Hong Kong's fragile stock rebound revealed in tumbling turnover

[HONG KONG] The 15 per cent rebound in Hong Kong's stock market is doing little to excite investors.

Even as the Hang Seng Index climbed to a 2016 high last month, the average value of shares traded in the city has collapsed to the least in 1 1/2 years. For Daniel So, a strategist at CMB International Securities in Hong Kong, the waning turnover shows asset managers aren't convinced that an improvement in China's economic figures for March will prove sustainable.

"Volumes haven't picked up even as stocks continued to rally, which shows there's not much momentum for them to go up further," Mr So said. "China's March data was good, but can it continue? International investors are especially skeptical."

So was almost alone last year in warning that China's planned circuit breakers would spur greater instability. Regulators abandoned the mechanism just days after their introduction in January was blamed for increasing panic selling.

Reports from industrial output to new loans topped estimates in March, assuaging fears China's economy was headed for a hard landing while adding to concern about credit risks.

The official Purchasing Managers' Index published over the weekend, which is among the first readings on growth in April, missed estimates. Hong Kong is also exposed to global risks from a potential US rate increase in June to Britain's referendum on leaving the European Union in the same month.

APRIL ADVANCE

The Hang Seng Index added 1.4 per cent in April, extending its rally from a Feb. 12 low to 15 per cent, even as mainland equities and bonds declined. China's economic data improved March as an unprecedented 6.6 trillion yuan (S$1.36 trillion) of new credit was created in the first quarter, spurred in part by a monetary-easing cycle that began in late 2014.

The Hong Kong stock index fell 0.8 per cent at 9.44am in the city on Tuesday as the market reopened from Monday's holiday.

A longer-term stock rally is "going to really take the government letting the economy slow to a more sustainable growth rate," said Francis Cheung, head of China Hong Kong strategy at CLSA in Hong Kong.

After a two-year climb, China's onshore bond market is starting to crack, with junk debt posting its biggest monthly selloff since 2014 as defaults and borrowing costs rise. UBS Group AG has warned increased nonpayments by state-owned enterprises will derail gains for mainland shares traded in Hong Kong.

PROPERTY, ENERGY

The city's equity rebound has been led by industries with woes of their own. The Hang Seng Properties Index's advance outpaced the overall benchmark by 8 percentage points in the past three months even as a tourism slowdown capped retail rents and home prices slid from record highs.

Three of the 10 top performers on the Hang Seng Index over the same period were Chinese producers of oil, the oversupply of which pushed prices to a 12-year low just earlier this year. Macau casino stocks, which outshone the broader market in March, are starting to falter as gambling revenues drop.

Hong Kong Exchanges and Clearing Ltd has gained 21 per cent from a 1 1/2-year low reached in January to HK$196.30.

Such a stock price assumes a daily turnover of HK$70 billion to HK$80 billion, said CMB's So, compared with an average HK$65 billion in April. A stock link between Hong Kong and Shenzhen, which is expected to start this year, will do little to boost trading as most major mainland investors already have access through the Shanghai programme, he added.

"People right now are just happy to sit on the sidelines and figure out what the market direction is," said CLSA's Cheung. "People know China's stimulus will fade and the economy will continue to slow."

BLOOMBERG