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Hong Kong's US$530b stock rally showing signs of strain

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Hong Kong's equity traders have made half a trillion dollars from a global risk rally. They'll have little to fall back on when the exuberance fades.

[SHANGHAI] Hong Kong's equity traders have made half a trillion dollars from a global risk rally. They'll have little to fall back on when the exuberance fades.

What worries pundits is that the rebound has been driven by liquidity, and that Hong Kong's bleak economic situation has yet to fully filter through to stocks. The Hang Seng Index is up 9 per cent from an August low, back above the key 27,000-point level, and it briefly rose above its 200-day moving average last week. But it is also near levels that signal it is overbought.

Months of protests have escalated in violence. A planned strike aimed at disrupting public transport on Monday morning resulted in two demonstrators being apparently shot by police. Police had no immediate comment.

Faced with its worst business outlook since the 2008 financial crisis and a plunge into recession, a chill may be coming for Hong Kong's corporate earnings. It may soon be time to sell, said He Qi, a fund manager with Huatai Pinebridge Fund Management Co who called the rally in mid-August.

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"Hong Kong's gains are just part of a global risk-on rally amid a flood of liquidity, and the short-term gains are way too strong," said Mr He, adding that China's elevated inflation leaves the authorities with little room to further cut interest rates, putting such a liquid environment at risk. "I might consider lightening positions as the index approaches 28,000 points, and even more so if it rises towards 30,000." The index closed 0.7 per cent lower Friday at 27,651.

China's largest brokerage Citic Securities Co earlier this month trimmed its earnings growth forecast on the Hang Seng gauge to 4 per cent this year from a previous estimate of as much as 8 per cent. The continuing protests in the city and the impact on commercial property, retail and tourism industries has gone beyond expectations, strategists led by Yang Lingxiu wrote in a note dated Nov 4.

To be sure, traders can still find opportunities in a market where many firms rely on the mainland for earnings. China's A shares are about 27 per cent more expensive than their Hong Kong listed peers, compared with a long-term average of 20 per cent. "There are so many bargains left on the table," said Sean Darby, a global strategist at Jefferies Hong Kong.

Still, the recession will likely make its presence felt in earnings for this year and in the first quarter of 2020, said Ken Chen, a Shanghai-based strategist with KGI Securities Co.

"There's no end in sight to the local unrest and expectations of an economic recovery next year remain low," he said. "Hong Kong is just rising along with global markets, and the gains will pause when the global rally weakens."

BLOOMBERG