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Hong Kong's world-beating stock gain falters after just two days

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A world-beating stock gain is quickly unraveling in Hong Kong, showing how fast sentiment can change as protests convulse the city.

A WORLD-BEATING stock gain is quickly unraveling in Hong Kong, showing how fast sentiment can change as protests convulse the city.

The Hang Seng Index lost 0.6 per cent in pre-market trading on Wednesday. It had surged 2.9 per cent in two days, with volatility sinking 11 per cent in that time. Short-selling volume reached 16 per cent of total equity turnover - near a record of 20 per cent in August - as bears were forced to unwind their positions. Forward points on the local dollar had slumped across tenors, signaling speculators were also retreating in the currency market.

Adding to the tension on Wednesday was a unanimous vote from the US Senate passing a bill aimed at supporting protesters in Hong Kong and warning China against a violent suppression. China reiterated its threat to retaliate against the bill. It comes after the city just witnessed one of its most violent weekends since the unrest began five months ago.

"Very weak fundamentals will take over investor sentiment at some point," said Hao Hong, head of research at Bocom International. "I'm not making any big calls at the moment. It's a very short-term trend trade that can disappear very quickly."

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Theories on what had supported gains earlier this week range from beaten-down valuations, China's move to trim borrowing costs to recently improved sentiment toward US-China trade negotiations. Hong Kong's political situation remains unclear, with any delay or cancellation of local district elections due this weekend a potential flash point for further unrest.

The Hang Seng Index rose 1.6 per cent on Tuesday, building on the previous day's 1.4 per cent advance. Stocks sensitive to the protests, such as property developers, were among leading gainers as were technology shares, which Pictet Asset Management Pte.'s Andy Wong said are generally shielded from the political situation.

The gauge trades at just over 10 times the next 12 months' earnings, a 35 per cent discount to global peers, data compiled by Bloomberg show. But that's still not appealing enough for some. "I don't see a huge valuation buffer that attracts me to the market given the protest risks and the damage to Hong Kong's reliability as a financial centre," said Nader Naeimi, head of dynamic markets at AMP Capital Investors Ltd.

Mr Naeimi, who oversees more than US$700 million in assets under management, sold his Hong Kong stocks in May and has been short the city's equities since September. "There will always be the threat now that it can spark again," he said of the unrest in an email, adding that he saw the recent rebound as bargain hunting on expectations that the worst might be over in Hong Kong. "I doubt it will be the case. "

With little visibility as to how the protests will play out, others see Hong Kong stocks as too risky. "There is little hope that a resolution to the protests will come any time soon," said Airy Lau, an investment director at Fair Capital Management, who exited his Hong Kong stock positions between May and August.

"Short-term, the Hang Seng Index is trading near the bottom of its trading range and may go up. It doesn't look like we're going to see a long-term rebound."

BLOOMBERG