This Market Is Defying the Odds

Is Hong Kong on your mind lately?

It has been on mine, but not for the obvious reasons.

Yes, Hong Kong has been through hell these past six months. That's how long the protests have been going on in earnest.

The city looks like a warzone, if you've been watching the news. Riot police fire tear gas, while radical protestors selectively destroy businesses closely linked to mainland China.

During my trip to Hong Kong last month, Chinese banks had their branches boarded up with a thick, fiberglass material. Even Starbucks – yes, Starbucks! – wasn't spared.

Meanwhile, a mini-department store operator from China made the decision to pull out of the city. More than half of its 100-plus stores had been torched and smashed beyond recognition... So maybe it wasn't a hard decision.

Then, just a few weeks ago, police laid siege to one of Hong Kong's biggest universities. More than a thousand protestors put up a defensive line, armed with javelins, bows and arrows, and thousands of Molotov cocktails.

It was surreal. I mean, this was a place my mother and I used to fly to and escape the political turmoil that was ripping apart Manila back in the 1980s.

Today, it's fast becoming a place few dare to go, whether for business or pleasure. But within all this negativity lies an opportunity.

Let me explain...

These days, folks simply aren't visiting Hong Kong like they used to. It's beginning to show in the numbers.

Tourist arrivals in October collapsed 43.7% year over year. And retail sales in Hong Kong tumbled 24% over the same period. That's the biggest decline since the Severe Acute Respiratory Syndrome ("SARS") virus turned Hong Kong's streets into a virtual ghost town back in 2003.

Until recently, real estate transactions were down as much as 90% in certain areas. And since May, before the protests began, property prices have fallen 5.2%. The economy also went into a recession in the third quarter.

But here's the thing... the stock market doesn't seem to care.

Hong Kong's stock market, measured by the Hang Seng Index, is still up 3.7% since the beginning of 2019. It's hard to imagine any other market going through the political hellfire and economic fallout that Hong Kong just experienced and it not being a bloodbath.

The truth is, Hong Kong's stock market is nothing like what it was when SARS hit the city nearly 17 years ago (when the Hang Seng fell 18% in six months).

Back then, the vast majority of the listed companies on the exchange were Hong Kong firms doing business in Hong Kong. That's no longer the case. And it's a big reason why this market has defied the odds this year.

The Hong Kong Stock Exchange is now dominated by companies that aren't even from Hong Kong... Those businesses are based mostly across the border, in China.

As of October 2019, mainland China-based companies made up 760 of the total 2,413 listed companies on the Hong Kong Stock Exchange. And more important, their combined market capitalizations accounted for 68% of the exchange's total.

Six of the 10 largest companies were Chinese firms deriving most – if not all – of their business from the mainland. And after Chinese e-commerce giant Alibaba (BABA) listed its shares in Hong Kong last month, that count has risen to seven.

It has also catapulted Hong Kong back to the world's top spot for total IPO funds raised. All this in a place that, in the news, appears to be coming apart at the seams.

It's hard to wrap your mind around, I know. But things simply aren't as ominous as we are made to believe.

This is one hated market (possibly the most hated today) that has somehow managed to avoid the worst possible outcome. And in large part, it's happening thanks to Hong Kong's growing dependence on China – not in spite of it.

Looking forward, we can expect the relationship between these two markets to grow even more. And once the dust settles, this should be a positive for Hong Kong stocks.

Good investing,

Brian Tycangco

 

Further Reading

"It's bad in Hong Kong," Steve writes. "And the media would have you believe there's no solving it." But while we'll likely see more chaos in the short term, Steve expects this situation to go from "bad to less bad"... Read more here: Riots in the Streets of Hong Kong.

"In Hong Kong, millions of people have marched in protests," Chris Igou says. But if fear of unrest has kept you out of Chinese stocks, you've missed out on a big opportunity... Get the full story here: Don't Let the Headlines Scare You... China Isn't on the Brink of Disaster.

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Market Notes

HIGHS AND LOWS

NEW HIGHS OF NOTE LAST WEEK

JPMorgan Chase (JPM)… financial giant
Moody’s (MCO)… credit-ratings firm
CRISPR Therapeutics (CRSP)… gene editing
Allergan (AGN)… pharmaceuticals
Merck (MRK)… pharmaceuticals
Bristol-Myers Squibb (BMY)… pharmaceuticals
Bausch Health (BHC)… pharmaceuticals
Humana (HUM)… medical care
Hologic (HOLX)… medical devices
TAL Education (TAL)… Chinese tutoring company
Alibaba (BABA)… Chinese e-commerce giant
Newmark (NMRK)… real estate
Toro (TTC)… landscaping equipment
Sony (SNE)… electronics
Kellogg (K)… cereal and snacks
McCormick (MKC)… spices
Lamb Weston (LW)… potatoes
Hormel Foods (HRL)… food products
Sysco (SYY)… food products
Avon Products (AVP)… beauty products
RH (RH)… luxury furnishings
Pan American Silver (PAAS)… silver

NEW LOWS OF NOTE LAST WEEK

Not many… It’s a bull market, you know!

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