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Why Hong Kong Equity Market Underperformed over the Past Few Years

Over the past few years, the role of Hong Kong as a gateway between the Mainland and the world has become remarkably prominent. Hong Kong no longer only provides funding and professional services to the Mainland in one direction, but also increasingly satisfies both the funding and investment needs in the Mainland in a two-way manner. Hong Kong now has become a platform for overseas companies to invest in the Mainland as well as for Mainland companies to go overseas, acting as a bridge between the Mainland and the rest of the world. As a result, the financial services industry, in particular the equity market, of Hong Kong recorded tremendous development. Over the past two decades, more and more Mainland-based companies listed in Hong Kong, greatly boosting the market capitalisation of Hong Kong equity market. Hong Kong also ranked first in terms of IPO fundraising last year. According to Bloomberg’s statistics, the market capitalisation of Hong Kong amounted to US$ 3.8 trillion, just behind the US, China and Japan, indicating Hong Kong’s role as an international financial centre in the region.

Sluggish performance over the past few years

Even though Hong Kong equity market recorded tremendous development over the past few years, the stock market performance continues to underperform. Comparing to the US, UK, Japan, the Mainland, and the Asian four tigers, Hong Kong’s Hang Seng Index ranked sixth (out of eight selected indices) and declined 20.8% over the past year. Its performance was just slightly better than the Mainland and Japanese markets, as the former experienced a stock market bubble burst while the latter was significantly affected by the appreciation of Japanese yen. In fact, all of the selected stock market indices, except the US, declined over the past year. The poor performance is likely the result of the sluggish growth prospect around the world, the bubble-burst in the Mainland market, sharp depreciation of emerging market currencies, and the uncertainties related to Brexit, etc.

In Hong Kong, the equity market has been performing poorly for some time. In the last five years, five out of eight selected indices increased, viz, the US, UK, Japan, the Mainland and Taiwan, while the remaining three declined, viz, Singapore, Hong Kong and Korea declined 9.0%, 7.2% and 6.2% respectively. Hang Seng Index even has one of the lowest average price-earnings ratios in the world over the past five years, standing at 10.3 currently and is one-fifth lower than the second lowest one among the eight selected indices, i.e. Singapore’s FTSE Straits Time Index. Nevertheless, Hong Kong equity market still could not stage a better performance and continues to underperform other markets. This report aims to explain why Hong Kong equity market has underperformed over the past few years.

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Content provided by Bank of China (Hong Kong)
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