Potential recovery for Hang Seng Index

Teo Huan Zi

THE Hang Seng Index (HSI) continued to show lacklustre performance in May 2022. The index saw a gentle downtrend after the recovery from the lows of mid-March. Although falling below the 20,000 level multiple times since March, the index has managed to stay above this psychological support level for the most part of April and May. China’s policies to control the spread of Covid-19, including the lockdown of certain cities, as well as the continued Russia-Ukraine war, have led to rising commodities prices that continued to weigh in on the performance of HSI.

The pandemic situation continues to dampen the performance of the index with China looking to maintain its zero-Covid strategy. However, with the number of cases seemingly under control, most of the impact has been priced into the stock markets. Any potential reopening of affected cities, especially Shanghai, in the coming weeks would be a positive catalyst for short-term movement.

China would also likely release more details regarding stabilisation policies by end-May, as well as tax rebates and subsidies in support of various industries such as agriculture. Government policies In support of economic growth would likely benefit Chinese stocks as well as the Hong Kong index. The China Securities Regulatory Commission (CSRC) and the US Securities and Exchange Commission (SEC) are also looking to resolve issues that have impacted the performance of Chinese ADRs (American Depositary Receipts) listed in the US.

Bullish scenario

A potential short-term recovery could be seen for the HSI, with more positive catalysts in the near term. If the index stays above the support from the Fibonacci 23.6 per cent level of 19,842 and the near term uptrend line beginning from mid-March, the index might break above to test the first resistance at the 20,800 to 21,000 level which would also be around the 50-day EMA level. The index could see further upside if the first resistance breaks into the next resistance level of 22,400 to 22,500.

If the rebound takes some time to develop, the downtrend line which is similar to the 200-day EMA level could be the index’s major resistance level, and might also coincide with the Fibonacci 61.8 per cent level of 22,440. However, the HSI has promising short-term potential to rebound from the current levels.

Bearish scenario

A bearish scenario is more unlikely to occur, however, if the government stimulus measures fails to instill confidence in China’s economic growth and support for the various industries. This could result in a further downside risk for the index.

Should the index correct downwards, the first support observed might be the 19,600-19,800 level, which is also the support level seen from the uptrend line from March to present. The next support level might be around the 18,200 region which saw the lows seen in March 2022. If the correction is seen, the HSI index would likely face a longer downward pressure going into the third quarter of the year and might only see a recovery in the final quarter of the year instead.  

The writer is senior investment specialist at Phillip Securities