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Short of the Week: the Hang Seng Index


It’s time to call another short on Hong Kong’s Hang Seng Index (HSI). The territory’s stock market is already trading well off the highs it saw in mid-January, when it was close to 30,000. It has since sold off, largely due to the effects of the Covid-19 epidemic on the global economy. Hong Kong is an international trading city, and any pandemic on this scale is going to hurt it.

The Hang Seng index spent last year trading somewhere between 25,300 and just under 30,000, which was proving to be a potent resistance level. Ongoing riots in the city had been keeping it below 28,000, but we had seen something of a rally from the start of December. The lockdown has hurt a Hong Kong economy that was already struggling, but the Hang Seng also needs to be seen in the context of what will happen next.

Hong Kong is in for a bumpy summer. It seems as if the Chinese government has started to lose patience with the pro-democracy protestors in Hong Kong and with the failure of the local Legislative Council to keep a lid on things. New security laws being passed in Beijing, to apply in Hong Kong, are further symptoms of the gradual tightening of Beijing’s control over the city.

“Hong Kong has now taken centre stage in a long-running conflict between the US and China,” says Han Tan, a market analyst with FXTM. “The recent announcement that the US State Department no longer viewed Hong Kong as autonomous is threatening to widen the rift between the world’s two largest economies.”

The Hang Seng Index already has a year to date decline of 17% to look back on. Stocks are cheap and there has been net buying of Hong Kong stocks from investors in mainland China. They have been net buyers in nearly every session bar six in 2020, which amounts to $35 billion coming over the border into Hong Kong. On top of that, Alibaba is expected to be added to the Hang Seng in August, a marquee name which will attract plenty of attention from China-based buyers. FXTM’s Tan reckons this could bring another $650 million into Hong Kong stocks.

But will it be enough to boost a floundering index that has missed out on recent stock rallies?

Hang Seng Index bear market

The Hang Seng is currently in a bear market. It is almost 30% off a record high in January 2018. It only managed to give back 7% to investors since March 23, compared with a gain of 23% for the MSCI Asia Pacific Index, a much more respectable post-Covid-19 bounce. What is holding things back?

“With Hong Kong at the epicentre of escalating US-China tensions, the chances of the HSI [Hang Seng Index] having enough lift to break out of this multi-year downward trend appears slim, at least over the near term,” says Tan at FXTM.

We would concur. We are in an election year with a President in the United States who is keen to divert attention from his handling of the Covid-19 crisis domestically, ideally by further stoking vote-winning tensions with China. The new security laws and the US response are just the latest moves by these two great powers as they square up in Asia.

Anecdotal evidence provided to us, off the record, by lawyers and fund managers, is that Hong Kong is losing its shine in the eyes of international investors. While the Alibaba listing might be a gesture of confidence by China in Hong Kong’s future, global investors may be to differ. We expect more political turbulence over the summer, both in Hong Kong and in Sino-US relations.


We would expect to see a continuing downtrend for Hong Kong stocks. This is being borne out by the technical. The 20 day moving average has dropped to the lower Bollinger band at the time of writing and the Relative Strength Index (RSI) for the Hang Seng is also suggesting a lack of upward momentum.

According to Ming Lam at City Index, we could see some downside support at around 22,100 points and 21,100, which mark the lows seen in March. This would be the most beneficial scenario. We think the index has the potential to drop as far as 18,300 this summer, if China can’t keep its hands off Hong Kong (unlikely) and relations between Beijing and Washington DC don’t improve (even less likely). Non-China investor confidence in Hong Kong is ebbing rapidly and this could be a theme we will be revisiting again as the summer continues.

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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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