Investor confidence in Hong Kong has plummeted to its lowest level in nearly 10 years over the US-China trade war and increased market volatility, according to J.P. Morgan Asset Management.
J.P. Morgan’s Hong Kong Investment Confidence Index fell below the neutral level of 100 into negative territory for the first time since 2009, the year following the global financial crisis. It dropped from 106 points in April to 88 points in November, according to the annual survey by the investment bank’s asset management arm.
The index is based on interviews with a random sample of more than 500 retail investors with at least five years of continuous investment experience, carried out between October 22 and November 1 by independent research firm Cimigo.
Since July, the US and China have been engaged in a trade war culminating in the US’ plan to raise tariffs on US$200 billion of goods from 10 per cent to 25 per cent, previously scheduled to start on January 1. That would add to the US$50 billion worth of tariffs on Chinese goods put in place in August.
That, combined with rocking emerging markets, US interest rate hikes and slowing economic growth, has created global market volatility. Shanghai and Hong Kong’s benchmark indices have dropped by nearly 20 per cent and close to 10 per cent, respectively, since the beginning of the year.
“Sentiment is fragile as investors are grappling with lingering trade tensions, higher volatility and slowing economic growth globally and in mainland China,” said Chris Tong, vice-president of retail distribution at JPMAM.
At the highly anticipated G20 summit in Argentina over the weekend, US President Trump and his Chinese counterpart Xi Jinping agreed on a ceasefire to halt the imposition of new tariffs for the next 90 days, allowing the two countries to negotiate and hinting at a better chance of reaching an agreement.
On Monday, markets rebounded globally. On the mainland, the benchmark Shanghai Composite Index rose 2.6 per cent to 2,654.8 in its biggest daily gain in a month. Hong Kong’s Hang Seng Index, meanwhile, grew by 2.6 per cent to 27,182.04.
But while sentiment may improve later this year or early next year, Tong does not expect JPMAM’s findings from early November – that 56 per cent of Hong Kong investors have reduced their risk appetite as a direct result of the trade war – to change soon.
On Friday, State Street Global Exchange’s Investor Confidence Index for the month of November showed a fall in confidence worldwide. The index decreased 1.7 points to 82.7, from October’s 84.4 which are both under the neutral level of 100.
“Investor confidence has posted one of its quickest deteriorations in a decade,” said Michael Metcalfe, senior managing director and head of Global Macro Strategy, State Street Global Markets.
“Dramatic drops in August and September were a prophetic warning of the market volatility that has dominated the fourth quarter, and investor confidence has fallen again in November.”
It found a drag in North American confidence, decreasing from 81.6 to 79.2, pulled down the global index, but Asian confidence had increased by 2.6 points to 102.2.
Hong Kong investors tend to take a shorter term view than investors in Asia as a whole, Tong said, explaining the disparity between the levels in the two confidence surveys.
In its report, JPMAM found almost a third of those surveyed would consider increasing their cash holdings, and just under 30 per cent have reduced exposure to risk assets like equities.
A plurality of Hong Kong respondents, 42 per cent, expects the Hang Seng Index to drop to between 24,000 and 26,000 by the end of April 2019. That would be a significant drop from its level of just over 27,000 on Tuesday.
“The overall message is people are still very negative, so they are trying to reduce their holdings across all equities,” said Tong.
Sectors where performance has been poor, like technology and new economy stocks, are ones to avoid, he added.
Though investors should be vigilant, macroeconomic uncertainties have created some attractive valuations for investors with a more long-term view, according to the report.
October’s market correction “offers a very attractive valuation and entry point,” said Tong.
“It is time for people to think about yield investment and build up a core portfolio” focusing on companies with a rich cash flow and a stable dividend payout like banking or utilities stocks.