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Hang Seng index plumbing six year lows on tech sell-off


All eyes on Hong Kong’s Hang Seng Index, which is plumbing lows we have not seen since 2016. Yes, that’s right, before the pandemic. There are several reasons underlying the sell off in Hong Kong stocks it seems.

The index is being dragged down by Chinese stocks. Investors are again becoming worried about China, despite some solid economic growth numbers coming out of the country. Some are concerned that China is looking too cosy with Russia, and it could face some heat in another round of international sanctions. China has threatened it would retaliate with sanctions of its own, but this has not stopped investors selling China stocks.

But what about Covid?

Probably of more potency is the further spread of Covid in China, and lockdowns in key industrial zones, especially the manufacturing hub of Shenzhen. This has seen some big stocks getting sold off. Among the big losers were Meituan (HK:3690). Meituan stock was already struggling, but it really fell of a cliff in mid-February.

Also getting slammed was (HK:9618), which is having a howler, having shed almost half of its value in HK dollar terms in the last 30 days. It does seem as if investors are starting to give up the ghost on China, with share price valuations now trading at phenomenally cheap levels. Shares in Tencent Holdings (HK:0700) have also been sold off in recent weeks, down at 298 from over 600 12 months ago.

With these big champions of the China online story all being sold hard, it is no surprise to see the Hang Seng index in such disarray.

“Fresh chaos for supply chains”

“Just as the world thought the worst of the pandemic was over, it seems it’s back to bite a chunk out of economic growth by causing fresh chaos for supply chains,” noted Susannah Streeter, senior investment analyst with Hargreaves Lansdown. “Major companies are suspending production, including Apple supplier FoxConn, and the car manufacturers Toyota and Volkswagen.”

China is locking down an entire province, Jilin, which sits just to the north of the Korean peninsular and is home to 17m people. This is the first time the Chinese government has locked down an entire province.

The problems in China have also overshadowed the oil market. A drop in anticipated demand in Asia was forcing crude futures prices down Tuesday. Brent crude oil came off by as much as 9% and US WTI was also showing a similar drop, with oil prices now down under the $100 mark in Europe.

Foreign shares could also be sold off

Although many European traders have been driven very much by the news coming out of Ukraine in the past two weeks, the pandemic looks to be rearing its ugly head again in China, and threatening fragile supply chains. Expect companies outside China to take a hit too, if investors see them as having supply chain exposure.

Hargreaves Lansdown reported investor confidence was down pretty much across the board this morning, based on a survey of 6000 of its clients. Confidence in Asian markets was still holding up until a few days ago, but we anticipate the picture could change dramatically if China is not able to contain its current outbreak. China remains committed to a zero Covid policy and will likely adopt more draconian measures in its efforts to contain it, but as we have seen with FoxConn, this will have major consequences for companies that rely on its factories.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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