Hong Kong stocks face worst earnings contraction since 2008

A pedestrian walks in front of a stocks display board showing the Hang Seng index.
A pedestrian walks in front of a stocks display board showing the Hang Seng index.PHOTO: AFP

HONG KONG • Hong Kong stocks are poised for their worst quarter since 2015, and corporate earnings are unlikely to save them.

After a selloff erased more than US$600 billion (S$832 billion) from the city's equities, attractive valuations stood as a potential bright spot. But those multiples do not look so good when analysts keep slashing their profit forecasts for 2019.

Their call for an average 19 per cent slump in operating income would be the biggest contraction for Hang Seng Index companies since the 2008 global financial crisis, data compiled by Bloomberg shows.

While a protracted US-China trade war and a weak yuan are to blame for a big chunk of the profit reductions, the latest cuts reveal a deeper issue. With Hong Kong's slowing economy buckling under the pressure of 11 straight weeks of protests, demand for everything from bank loans to utility gas may be jeopardised.

"The third quarter could be even worse given the local poli-tical situation and the trade war escalation," said Mr Jackson Wong, asset management di-rector of Amber Hill Capital. "Potential downside surprises have not been fully reflected in share prices."

Shangri-La Asia slumped as much as 7.5 per cent yesterday after saying that "political events" in Hong Kong affected one of its flagship hotels in the city, while the weaker yuan hurt revenue in mainland China.

Cathay Pacific Airways also said the protests will have a "significant impact" on revenue from this month. The airline, which saw its employees' par-ticipation in the protests draw the ire of Beijing, cited weaker business and leisure traffic into the city.

Shares of utility provider Hong Kong and China Gas fell 5.3 per cent on Wednesday after it posted disappointing results and said the local business environment is "full of challenges". Political unrest in Hong Kong may dampen its sales to the hospitality industry as people opt to cook at home rather than dine out, said analysts at Daiwa Securities Group.

The threat from the trade war and weeks of local unrest has been apparent in the property market as well as hotel occupancy and retail sales. CK Asset Holdings, whose shares fell to their lowest since January 2017 last week, postponed a luxury residential project because of the protests.

 
 
 

HSBC Holdings and BOC Hong Kong Holdings have lost about 9 per cent this month as investors become increasingly concerned about capital flight.

A weak yuan is also bad news for the Hang Seng Index: Its firms get an average 64 per cent of revenue from the mainland, and 22 per cent from Hong Kong, Morgan Stanley calculates.

The currency broke past the key seven per US dollar level this month for the first time since 2008, and has traded weaker than that level for more than two weeks.

The gloomy profit outlook comes at a critical time for Hong Kong's equity market. While cheap valuations spurred some dip-buying this week, strategists at Morgan Stanley and Credit Suisse Group are among those turning more bearish. The Hang Seng Index is still down 13 per cent since its April high, one of the worst returns in the world.

"I don't know when earnings will turn around," said Amber Hill's Mr Wong. "For that to happen, we at least need a stable political environment in Hong Kong and an agreement to end the trade war."

 
A version of this article appeared in the print edition of The Straits Times on August 23, 2019, with the headline 'HK stocks face worst earnings contraction since 2008'. Print Edition | Subscribe