UBS Group AG has lowered its target for Hong Kong’s benchmark stock gauge by 25 percent, saying its worst-case scenario for the territory is coming true as the economy weakens and tourism arrivals decline.
The Hang Seng Index is expected to slide to 19,775 as slowing growth in the territory and mainland China weigh on corporate earnings, UBS analyst Spencer Leung (梁裕昌) wrote in a report issued on Wednesday. That is a 5.5 percent drop from the last close and implies a 16 percent decline for this year.
In December last year, UBS’ target for the Hang Seng Index at the end of this year was 26,484 and the 19,775 level was the “black sky” of four possible outcomes.
“On the back of slower economic growth in China and more signs that a US rate hike is approaching, we believe the current valuation of Hong Kong equity may not be attractive enough to compensate for potential earnings downside,” Leung said in the report. “Our black sky scenario could be a better portrayal of the challenges in the current environment.”
Hong Kong stocks are being buffeted by a global sell-off, China’s equity rout and a downturn in tourism that is hurting shop rents and retail sales. The Hang Seng Index last month entered a bear market, and is the developed world’s worst-performing stock gauge this quarter.
Hong Kong shares ended another painful week on a negative note yesterday, with Chinese firms listed in the city taking a further hit from worries about the mainland economy, which has also rumbled global markets.
The Hang Seng Index ended 0.45 percent, or 94.33 points, lower at 20,840.61 and the Hang Seng China Enterprises Index ended down 1.42 percent, with observers noting it has given up one-quarter of its value since the start of the year.
The Hong Kong market was closed on Thursday for a public holiday. Markets in Shanghai and Shenzhen were also closed on Thursday and yesterday and are set to reopen on Monday.
“The slowdown in China’s economy is always on the back of people’s minds, it’s the big worry,” Hong Kong-based VC Brokerage Ltd (匯盈證券) director Louis Tse (謝明光) told Bloomberg News.
While valuations of Hong Kong shares are becoming more attractive, they are still too high, given the worsening outlook for earnings, Leung said. Hong Kong company profits are expected to tumble 31 percent next year from this year under the black-sky scenario, he wrote.
He also reduced his estimate for the MSCI Hong Kong Index by 27 percent to 10,443.
Hong Kong also faces the risk of importing higher interest rates from the US because of its currency peg to the US dollar. Traders see a 56.5 percent chance that the US Federal Reserve will raise borrowing costs by December, a move that would translate into higher mortgage costs in a city where property companies make up about one-quarter of the MSCI Hong Kong measure.
Companies including Cathay Pacific Airways Ltd (國泰航空), Chow Tai Fook Jewellery Group Ltd (周大福珠寶), Wharf Holdings Ltd (九龍倉) and Galaxy Entertainment Group Ltd (銀河娛樂集團) are the least preferred at UBS, according to the report.
Cheung Kong Property Holdings Ltd (長地集團), Sun Hung Kai Properties Ltd (新鴻基地產) and Swire Pacific Ltd are among the brokerage’s top picks.
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