Hang Seng Index consolidating for potential rebound

THE Hang Seng Index (HSI) has seen a remarkable rebound from a low of 14,597 at the end of October 2022. The economies of both China and Hong Kong were heavily impacted by strict Covid-19 pandemic restrictions after the resurgence of hotspots earlier in 2022. Regulatory concerns also impacted consumer confidence in the fast-growing technology and platform companies.

The HSI also underwent a month of consolidation after China relaxed its prolonged zero-Covid policy. Fluctuations were seen as the stock markets assessed the risks led by the quick reversal of restrictions. The index currently sits comfortably above the 20,000 level and is supported by China’s policies to kickstart the country’s growth again, coupled with the increased clarity on various industry regulations.

Bullish scenario

The index saw two bullish crossovers of its simple moving average (SMA) in November 2022 and January 2023. These also coincided with strong index performance which stayed above the 20-day SMA. Consolidation in December 2022 faced resistance from the 200-day SMA level but managed to break up along with the 20-day SMA line. Currently, the support for the index is the 200-day SMA level, at around 20,100 to 20,300, while the near-term support is between the Fibonacci 76.4 per cent level of 20,788 and the psychological level of 21,000.

With the resumption of travel and tourism around Asia, regional spending is likely to increase as fear of Covid-19 subsides. China’s domestic tourism would likely also be a strong boost for the Hong Kong economy.

Bearish scenario

Although a bullish momentum is more likely to take place, headwinds may affect the index performance as well, due to increasing tensions between the China and US. The index failed to break above the 22,600 to 22,800 resistance zone in 2022. If the support levels do not hold, the index might see a potential retracement to the 61.8 per cent Fibonacci level of 19,600 or the 50 per cent Fibonacci level of 18,600 in the event of multiple headwinds. However, as compared to the western countries trying to rein in inflation and navigate the high interest rate environment, China and Hong Kong are in a better position to come out of the pandemic, where the slower expected growth still outpaces other developed nations.

The writer is senior investment specialist at Phillip Securities