A more bullish Hang Seng in 2021?

THE Hang Seng Index (HSI) had a challenging 2020, with the index down -5.36 per cent year to date (as of Dec 17, 2020) even after rallying off March lows. HSI not only faced a challenging year due to the multiple outbreaks of Covid-19 in the city, it also faced challenges both politically and economically.

As Hong Kong prepares for the end of 2020, the city is still tackling the spike in Covid-19 cases, with the government implementing new measures to rein in the spread. The current challenge remains to identify the source of the cases even while the new number of daily cases drop.

In November, China's State Administration for Market Regulation (SAMR) released the draft anti-monopoly measures for Internet platforms, designed to curb the dominance of big Internet and technology firms. This gave rise to some volatility in the sector, which contributed largely to the rebound of the Hong Kong stock markets. With more Internet giants being part of the HSI after a recent review of the constituents, regulatory pressure of these firms dampens the recovery phase of the index, which results in it lagging behind other Asian indices.

In the long term, these measures, which strengthen China's oversight of the big tech companies, might turn out to be beneficial for the growth of the industry. However, US regulations or restrictions might be another concern with the United States and China both jostling to be the leader in new technological advancement.

President-elect Joe Biden's administration is expected to be less hardline on trade tariffs, but the political changes in Hong Kong might continue to face some objections from Western governments.

Hong Kong will have a tough start in 2021 with vaccination of the population taking more time than expected. But the upside for the country remains tapping on fast growth of technology companies, riding on the global trend of digitalisation.

Bullish scenario

HSI rebounded off the bottom of the short-term descending channel, which is also near the Fibonacci level of 61.8 per cent at 26,102. The positive outlook stems from the optimism of vaccine development and approvals, which should see worldwide usage by 2021 and possibly speed up the worldwide economic recovery earlier than previously projected.

The resistance would be 27,980 to 28,467 where 28,000 might be a psychological barrier as well. In the short run, I believe the index might consolidate around this region before breaking above the channel to above 27,000 by end of December 2020. The break-up in end-October provides the basis for the index to continue the uptrend momentum from March to August 2020.

Bearish scenario

In the near term, the pandemic situation can still hit markets, especially if the spread is not effectively controlled, resulting in extension of the restriction measures which affects economic activity.

The first support zone should be between 25,422 and 25,722. However, it might drop to the 38.2 per cent Fibonacci levels as well if Western countries suffer further setbacks in the control of the pandemic.

The bearish scenario should be limited to the short to medium term as the vaccine optimism would kick in regardless of the pandemic situation by mid-2021.

The 200-day EMA might serve as another method investors can look at as the support level as well.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.