Beaten Hang Seng Index Trading Below Book Value For Third Time In 27 Years May Signal Massive Recovery In Hong Kong Stocks

Hong Kong stocks are depreciated so much that the Hang Seng Index is now trading below its net asset value for the third time in nearly 30 years.

The 50-member benchmark was valued at 0.92 times book value in March, meaning stock prices were below the reported values ​​of the constituent companies. This was the third time the metric has fallen below 1, according to Bloomberg data that began tracking valuations in 1993. The Hang Seng last traded at 0.99 times the NAV.

This probably bodes well for stocks, if history is to be trusted. When the Hang Seng’s price-to-book ratio was less than 1 in 1998 and 2016, the equity gauge jumped at least 36% the following year.

The Hang Seng Index, which was developed by the bank of the same name in 1964, is the only major equity benchmark in the world to fall below net asset value, as the coronavirus epidemic swept through them. global financial assets. The Standard & Poor’s 500 index multiple is 2.89 times and the Shanghai Composite Index multiple is 1.36 times.

The downgraded valuation prompted GF Securities to issue a bullish call on city stocks for the second quarter and Guosheng Securities to describe it as a “gold” buy opportunity.

“Low valuations are no reason to buy, but extremely low valuations can,” said Liao Ling, analyst at GF Securities in Shanghai. “Extremely low valuations have already implied pessimism about an overseas crisis scenario and deteriorating fundamentals. There is no need to be too pessimistic and we recommend adding Hong Kong stocks to the second trimester.”

Shanghai overtakes Hong Kong as the world’s top IPO destination

Of the 50 companies in the Hang Seng Index, 26 are trading below their book value. Shares of Swire Pacific, a conglomerate that runs businesses from real estate and food to airlines, had the largest discount from declared value, with a book value of 0.27 times, according to the Bloomberg data.

The Hang Seng Index jumped 69 percent in 1999 after trading at a discount of up to 7 percent from its book value a year earlier. It increased 36% in 2017 after the gap was around 3% the year before.

The gauge entered bearish territory for the second time in two years on March 13 after falling 20% ​​from an April high. Dip buyers are already on the move. Mainland traders invested HK $ 228 billion ($ 29.4 billion) in Hong Kong stocks in the first three months of the year, compared to net purchases of $ 249 billion for all of 2019, according to Bloomberg data.

“The worst of overseas selling may already be behind us and the impact of the overseas uproar on Hong Kong stocks will ease,” as global policymakers and central banks take action to cushion the economic damage caused by the disease, said Zhang Qiyao. , analyst at Guosheng Securities.

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This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice on China and Asia for over a century. For more SCMP stories, please explore the SCMP app or visit the SCMP Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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