HONG KONG - Hong Kong Exchanges and Clearing (HKEX) is having its best week in years.
China’s latest pledge to boost liquidity in the financial hub as well as solid earnings beat are raising hopes that the bourse’s worst days are behind it. The stock has soared about 16 per cent so far this week, the best performance since the hopes of China’s reopening in late 2022 after the Covid-19 epidemic.
There has been a rush of mainland funds into Hong Kong equities as traders started buying the dip earlier in 2024. Chinese regulators’ vow to encourage companies to list in the financial hub and moves to diversify out of a weakening yuan also bolstered the market. That may improve initial public offerings and average daily turnover for HKEX, reversing steep declines seen in the stock since early 2023.
While Beijing’s plans will have limited impact on short-term turnover, they “could further strengthen HKEX’s unique position in connecting China and the world”, UOB Kay Hian analyst Kenny Lim wrote in a note dated April 25.
A strong earnings beat for the three months through March, aided by higher-than-expected investment income, adds to the stock’s attractiveness. Analysts see continued momentum in income on the back of more sustainable recovery in average daily turnover and a broader re-rating of market valuation.
Chinese investors have bought more than HK$74 billion (S$12.9 billion) worth of stocks in April via southbound trading links, according to data compiled by Bloomberg. That is helping to turn Hong Kong’s equity gauges into some of the world’s best performing major indexes in April.
Still, Hong Kong Exchanges’ stock remains 56 per cent below a peak in 2021, suggesting there are more legs to come.
Goldman Sachs Group analysts forecast a bottoming out in average daily turnover in the first half, which would likely lead to higher estimates for earnings per share. Cash trading of stocks is the biggest single driver of the company’s earnings, accounting for nearly a third of revenues.
HKEX management’s reforms to a narrow bid-ask spread “would have the potential to reduce friction in the system and hence raise turnover velocity and a result cash equity average daily turnover”, Goldman analyst Gurpreet Singh Sahi wrote in a note. BLOOMBERG
