Why HK equities appear poised for further gains

More than 1,300 out of a total of about 2,000 Hong Kong-listed firms had published their interim results as of September 12.

According to an analysis, the companies saw their combined sales revenue rise 9.3 percent from a year earlier and the total profit expand 12.3 percent.

For the period, 58 percent of the firms reported positive sales growth, while nearly 55 percent has positive profit growth, which is rather encouraging.

The earnings per share (EPS) metric of Hang Seng Index constituents started bottoming out since the second half of last year. The recovery further picked up steam this year. The EPS of bluechip stocks has surged 14 percent on average since the bottom of last year.

The earnings uptick of Hong Kong-listed companies has come along with improving global economic growth.

Also, the six-month moving ratio of positive profit alerts also started to pick up since the last quarter of 2016. The ratio has hit a six-year high of 46 percent as of September 12.

Such strong fundamentals would become a key catalyst for the Hong Kong market.

Now, how much higher can the market go? The cyclically adjusted price-to-earnings ratio (CAPE) may provide some hints.

CAPE now is at 14.11, remaining at the low end of the historical average of 16.08 seen since 1980. That means Hong Kong stocks remain relatively cheap from valuation perspective.

Historical data shows that the Hang Seng Index has an average rally of over 20 percent in the following year when the CAPE stays at 14.1.

If so, the Hang Seng Index is likely to hit a record high of 33,600 points. That means there is still plenty of room on the upside.

This article appeared in the Hong Kong Economic Journal on Sept 14

Translation by Julie Zhu

[Chinese version 中文版]

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