Hong Kong Stock Gains Lead the World's Major Indexes, but May Mislead

 | Nov 14, 2017 | 11:00 AM EST
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The stock market in my home town, Hong Kong, has advanced the most so far this year among the major Asian exchanges. The Hang Seng index closed Tuesday up 32.6% in 2017.

That puts it ahead of South Korea's record highs, a 24.7% advance driven largely by Samsung Electronics. It also puts the Hang Seng ahead of the resurgent Japanese market, where the Nikkei 225 is flush with past glory, and a 17.1% rise.

Hong Kong stocks dipped 0.1% on Tuesday after China filed data showing the economy downshifted in October, with industrial output, fixed-asset investment and retail sales all missing expectations. But the Hang Seng is still outdoing Nasdaq's FANG-fueled 25.5% climb by an arm's length.

However, investors need to look a little closer at the outperformer. The gains in Hong Kong have been driven largely by Chinese gaming giant Tencent Holdings (TCEHY) , which has its main listing here and is the largest company on the stock exchange by value.

Riding rampant Chinese smartphone use and the world's top-grossing mobile game, Honour of Kings, Tencent's shares have doubled this year alone. It closed at a record high on Nov. 7 and is currently accounting for around one-third of the advance for the whole Hang Seng.

Mainland Chinese shares have shared little of the same enthusiasm. The markets in Shanghai, up 10.5%, and Shenzhen, up 13.4%, represent a better picture of the broader market in my part of the world.

Back in Hong Kong, the Hang Seng, now at 29,152, still has some ground to make up before it retests its all-time high, set just before the financial crisis. It peaked at 31,638 in October 2007, before losing two-thirds of its value.

It doesn't feel like we're anywhere near that kind of cliff edge. But I guess you never see those until you're looking up. 

Besides Tencent, Hong Kong's stock exchange has also been driven higher by its heavy concentration in finance and real estate. Record-high property prices in Hong Kong have boosted profitability here, while leaving a lot of citizens despairing that they'll never be able to afford a home.

Gains in Chinese insurers have been heady since around 2015, with the mainland Chinese population both getting older and richer, causing a structural shift into such products. Ping An Insurance (PNGAY) has also seen its shares double (well, almost -- they're up 94%) this year. On the banking side, ICBC (IDCBY) , the world's largest bank by assets, is up 33% in 2017, mapping the broader Hang Seng. It's the second-largest component in the index after Tencent.

Two companies that won't be celebrating are the airline Cathay Pacific (CPCAY) and the Chinese state-owned oil company Kunlun Energy (KLYCY) . They drop out of the 50-stock Hang Seng as of Dec. 4, a move confirmed on Friday.

It's particularly galling for Cathay, which drops out after 31 years, included in the index days after it listed in 1986. But Hong Kong's flagship carrier, while still my favorite airline to ride, has lost half of its market value since 2010 and become the smallest stock currently included. The airline has struggled to fight off regional rivals, particularly from China, and suffered losses from poorly judged long-term fuel hedges struck just before oil fell off a ledge.

Cathay and Kunlun have lost their places to the property developer Country Garden Holdings (CTRYY) and the Apple (AAPL) supplier Sunny Optical Technology (SOTGY)  Both of the companies have seen their shares double over the past 12 months.

We hardly need another property developer in the Hang Seng, but Country Garden does represent the mass China housing market. The company builds out huge greenfield and brownfield sites for mid-range homes. Sunny Optical makes lenses like the ones that go in your smartphone.

It's not quite true that Hong Kong is the top-performing market in Asia. That particular trophy goes to Mongolia, where the Ulaanbaatar exchange has ridden the boom in the country's coal trade through a 71.2% rampage in 2017. Although the Mongolia exchange has knocked around since 1991, it's by some counts the smallest stock market in the world, with a total market capitalization of $1 billion for the 330 or so companies combined.

China's recent economic resurgence has ramped up demand for Mongolian coal. But the run-up is mainly the follow-through from a $5.5 billion bailout of the government from the International Monetary Fund, a deal agreed in May.

It's designed to break the cycle of boom and bust that Mongolia's mineral-concentrated economy has experienced. Solid growth at the turn of the century gave way to a 1.3% recession in 2009, then leaped to 17.3% growth by 2011 -- only to crash again to a 1.0% economic advance last year.

Vietnam's tiny stock market is also going gangbusters. The Ho Chi Minh City Stock Exchange has advanced neck and neck with Hong Kong, up 32.6% as of Tuesday's close. 

It's odd to name your stock exchange after a Communist revolutionary hero, if you ask me, but investors in the decade-old market are surely not complaining. Total market capitalization is $92 billion -- so it's 92 times the size of the Mongolian market, but would fit 36 times inside the Hong Kong exchange.

Vietnam's government is determined to privatize state-owned enterprises and push market-driven economic reform. The country shares a similar rate of growth to China -- an anticipated 6.8% for this year, compared with China's forecast 6.9%.

Private companies have been making the most of the new-found interest in stock trading, too. Vincom Retail, the country's largest shopping-mall developer, went public at the start of last week in the country's largest-ever initial public offering, raising $709 million to value the company at $3.4 billion.

You can consider the depth of the market by noting that, while the developer sold 13.3 million shares, there were only 800 that changed hands during its first session of trade.

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