Hong Kong stocks adjusted after the holiday surge- the Hang Seng Index once fell by more than 3%, and mainland real estate stocks and brokerage stocks fell sharply

This year’s National Day holiday has brought the Chinese stock market to the forefront, leading global gains and capturing the interest of investors keen on Chinese assets.

However, as the Hong Kong stock market opened on October 8th, it faced a decline, with the Hang Seng Index dropping 1.08% to 22,849.23 points. The Hang Seng Tech Index fell by 1.73%, and the Hang Seng China Enterprises Index decreased by 1.16%. Many brokerage and domestic insurance companies experienced losses, with China Merchants Securities plummeting nearly 15% and Sunshine Insurance declining over 8%. On a brighter note, semiconductor stocks continued their upward trend, with Hongguang Semiconductor rising more than 14%. Meanwhile, Taimei Medical Technology opened its debut day nearly 14% lower.

By our latest update, the Hong Kong market decline has intensified, with the Hang Seng Index falling over 3%. The Hang Seng Tech Index is down more than 5%, while the Hang Seng China Enterprises Index has dropped close to 4%. Real estate stocks took a significant hit as well, with Agile Group losing more than 22%, China Jinmao declining over 19%, and R&F Properties down more than 18%.

Interestingly, during the National Day holiday (October 1 to October 4), the Hong Kong stock index soared significantly, while most global markets posted declines. Specifically, the Hang Seng Tech Index surged by 10%, and the Hang Seng Index rose by 7.6%.

Looking at other markets, the Nikkei 225 gained 1.9%, the UK’s FTSE 100 increased by 0.5%, and the Dow Jones Industrial Average in the U.S. saw a slight rise of 0.1%. In contrast, the S&P 500 and Nasdaq dipped by 0.2% and 0.3%, respectively. The South Korean composite index dropped by 0.9%, while the German DAX fell by 1.1%, France’s CAC40 decreased by 1.2%, and India’s Sensex 30 plummeted by 3.1%.

The performance of Hong Kong stocks during National Day captured global interest, particularly in the non-bank financial and real estate sectors, alongside high-tech industries like semiconductors and life sciences, which led the gains.

During the holiday itself, Hong Kong’s information technology sector rose by over 11%, outpacing other industries with an 11.92% increase. The real estate and construction, healthcare, energy, and consumer staples sectors all enjoyed increases exceeding 10%, with gains of 10.70%, 10.69%, 10.51%, and 10.43%, respectively. The financial sector, industrials, and conglomerates also registered gains of over 9%, increasing by 9.47%, 9.29%, and 9.07%.

While U.S. markets like the Nasdaq, Dow, and S&P posted only modest gains during the holiday, Chinese stocks listed abroad showed significantly better performance, particularly in the financial real estate sector.

The Nasdaq Golden Dragon Index surged about 10% during the National Day holiday, with trading volume spiking fourfold compared to the mid-year levels. Notably, the Golden Dragon Index had a cumulative gain of nearly 30% in September.

According to Guotai Junan International, the rapid rise of the Chinese Golden Dragon Index aligns closely with the surge in Hong Kong stocks. It’s noted that both indices share a similar industry distribution among their constituent stocks, with roughly 80% coming from sectors like media, consumer discretionary (internet platforms), and consumer services.

“Additionally, there is significant overlap in the constituent stocks of the two indices; over 70% of the Chinese Golden Dragon Index stocks are listed in both markets or have American Depository Receipts (ADRs) in the U.S. If stock prices diverge excessively, it creates arbitrage opportunities for investors, helping to realign prices and resulting in similar movement between the Chinese Golden Dragon Index and the Hang Seng Tech Index,” Guotai Junan International commented.

Market analysts attribute the sharp increase in Chinese asset prices and trading volumes during the National Day holiday to favorable developments both domestically and internationally.

Domestically, Dongwu International highlighted proactive real estate and consumption subsidy policies aimed at boosting consumer confidence. During the holiday, property viewings surged, with many regions reporting significant increases in sales. The Ministry of Housing and Urban-Rural Development noted that cities running promotional activities generally saw a year-on-year visitation increase of over 50% since the holiday began.

“There was also a noticeable uptick in travel during the holiday. The Ministry of Transport reported over 1.18 billion inter-regional trips made in the first four days, up 21.94% and 2.92% compared to 2019 and 2023, respectively,” Dongwu International added.

On the international front, Dongwu International pointed to a cooling of U.S. economic data. Non-farm payrolls saw a significant downward revision of 818,000 for the period from April 2023 to March 2024, while August’s PCE inflation fell to 2.2%, the lowest since March 2021. Additionally, the Federal Reserve cut rates by 50 basis points in September. While employment data may briefly disrupt the rate-cutting trajectory, it does not change the mid-term downward trend of U.S. dollar rates.

“Recent, unexpected, substantial interest rate cuts from the Federal Reserve, along with ongoing domestic policy initiatives, have significantly fueled the rapid recovery of Chinese asset prices. Both the Hong Kong and A-share markets have enjoyed multiple days of gains surrounding the National Day holiday, while Chinese ADRs in the U.S. have performed strongly as well,” Guotai Junan International concluded.

They further noted that the Nasdaq Golden Dragon Index presents an opportunity for overseas investors to engage with Chinese assets. Currently, the index’s valuation remains relatively low, providing a high margin of safety and expected return. Despite the recent recovery in Chinese asset prices, the price-to-earnings ratio of the Golden Dragon Index sits at 19.5 times, still considered low and slightly below historical averages, with a historical percentile of 32.5%.