(Bloomberg) -- Investors in Hong Kong stocks have a complex task trying to decipher the impact of increasingly extreme actions taken by Washington and Beijing on the city’s listed firms.
The broad sweep of Hong Kong’s new national security law, a planned ban on U.S. residents doing business with Tencent Holdings Ltd.’s WeChat app, as well as sanctions on some officials in the former British colony all hold potential for unforeseen consequences for various firms and industries. (Not to mention the impact from the coronavirus pandemic.)
Take Tencent. On Friday the stock plunged more than 10% amid confusion over the scope of the ban, before paring its loss to 5% after a U.S. official clarified the order. No matter, the shares fell a further 3% on Monday. The stock, which reports earnings on Wednesday, has been the biggest support to the Hang Seng Index this year, while analysts are overwhelmingly bullish on the stock.
What about sanctions on Hong Kong’s leader Carrie Lam and others? While the city’s banking regulator said local banks had no obligation to follow U.S. sanctions under domestic laws, financial institutions risk getting caught between Beijing and Washington no matter how they react.
“Banks are in a dilemma,” said Kenny Wen, wealth management strategist at Everbright Sun Hung Kai Co. “If they follow the U.S. and apply the sanctions, Beijing will be annoyed. If they do not apply sanctions, the U.S. will be angry.”
HSBC Holdings Plc., which has a historically dominant position in the city, has faced criticism from both China and the U.S. The British bank’s shares have tumbled 45% this year and are close to falling below their 2009 low.
While the Hang Seng Index was resilient on Monday, and was last little changed, that partly reflects how beaten down it already is. The measure, which has lost 13% this year, trades at its cheapest relative to MSCI Inc.’s global peers on a price-to-book basis since the Asian financial crisis in 1999.
“Any investor who’s considering buying assets in the city, be it stocks or property, will want to apply a further discount to reflect rising political uncertainty,” Wen said.
Adding to the heightened atmosphere was the high-profile arrest on Monday of media tycoon and democracy activist Jimmy Lai under the national security law. Television footage showed dozens of police officers raiding his newspaper Apple Daily. Next Digital Ltd., the listed shares of his media network, plunged as much as 17% after the news before more than quadrupling in early afternoon trade.
For Cliff Zhao, head of strategy at CCB International Securities Ltd., investors have no reason to panic. Lai’s arrest was expected, while sanctions on Hong Kong officials were not too surprising, he said.
“There’s no sign of foreign capital fleeing Hong Kong,” Zhao said. “For any foreign investors who want a share of China’s economic growth, they have no other choice than to use Hong Kong as a proxy.”
The Hong Kong dollar remains near the strong end of its trading band against the greenback, while the stock market has been the recipient of heavy inflows from mainland investors.
Still, the city seems to be bearing the brunt of the growing cold war between Beijing and Washington. While the Hang Seng Index remains in the doldrums, China’s CSI 300 Index of stocks in Shanghai and Shenzhen has climbed 16% this year, and the S&P 500 Index has gained almost 4%.
Raymond Chen, a portfolio manager at Keywise Capital Management (HK) Ltd., is cutting exposure amid concern foreign funds will exit the city.
“The increasingly worsening China-U.S. tensions will deal a blow to markets,” Chen said. “Right now the sanctions are on technology sectors and officials but it’s possible that we’ll see similar actions in the financial segment in future. Risk reward in equities is less attractive now and I have started taking profits from last week in both China and Hong Kong markets.”
©2020 Bloomberg L.P.
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