(Bloomberg) -- A world-beating stock gain is quickly unraveling in Hong Kong, showing how fast sentiment can change as protests convulse the city.
The Hang Seng Index lost 0.8% Wednesday. It had surged 2.9% in two days, with volatility sinking 11% in that time. Short-selling volume reached 16% of total equity turnover -- near a record of 20% in August -- as bears were forced to unwind their positions. Forward points on the local dollar had slumped across tenors, signaling speculators were also retreating in the currency market.
Adding to the tension Wednesday was a unanimous vote from the U.S. Senate passing a bill aimed at supporting protesters in Hong Kong and warning China against a violent suppression. China reiterated its threat to retaliate against the bill. It comes after the city just witnessed one of its most violent weekends since the unrest began five months ago.
“Very weak fundamentals will take over investor sentiment at some point,” said Hao Hong, head of research at Bocom International. “I’m not making any big calls at the moment. It’s a very short-term trend trade that can disappear very quickly.”
Theories on what had supported gains earlier this week range from beaten-down valuations, China’s move to trim borrowing costs to recently improved sentiment toward U.S.-China trade negotiations. Hong Kong’s political situation remains unclear, with any delay or cancellation of local district elections due this weekend a potential flash point for further unrest.
The Senate measure would require annual reviews of Hong Kong’s special status under U.S. law to assess the extent to which China has chipped away the city’s autonomy. China’s Foreign Ministry has repeatedly warned that there would be “strong countermeasures” for passing legislation supporting protesters. Hong Kong’s benchmark stock gauge fell below the 27,000 level.
“If the bill becomes law, we will see more downside because China will further delay the trade deal,” said Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd. “The news may cause some mild profit-taking in the short term after the Hang Seng Index rallied.”
The Hang Seng Index rose 1.6% on Tuesday, building on the previous day’s 1.4% advance. Stocks sensitive to the protests, such as property developers, were among leading gainers as were technology shares, which Pictet Asset Management Pte.’s Andy Wong said are generally shielded from the political situation.
The gauge trades at just over 10 times the next 12 months’ earnings, a 35% discount to global peers, data compiled by Bloomberg show. But that’s still not appealing enough for some. “I don’t see a huge valuation buffer that attracts me to the market given the protest risks and the damage to Hong Kong’s reliability as a financial center,” said Nader Naeimi, head of dynamic markets at AMP Capital Investors Ltd.
Naeimi, who oversees more than $700 million in assets under management, sold his Hong Kong stocks in May and has been short the city’s equities since September. “There will always be the threat now that it can spark again,” he said of the unrest in an email, adding that he saw the recent rebound as bargain hunting on expectations that the worst might be over in Hong Kong. “I doubt it will be the case. ”
With little visibility as to how the protests will play out, others see Hong Kong stocks as too risky. “There is little hope that a resolution to the protests will come any time soon,” said Airy Lau, an investment director at Fair Capital Management Ltd, who exited his Hong Kong stock positions between May and August.
“Short-term, the Hang Seng Index is trading near the bottom of its trading range and may go up. It doesn’t look like we’re going to see a long-term rebound.”
(Updates with market close)
--With assistance from Jeanny Yu.
To contact the reporters on this story: Elena Popina in Hong Kong at firstname.lastname@example.org;Livia Yap in Shanghai at email@example.com
To contact the editors responsible for this story: Sofia Horta e Costa at firstname.lastname@example.org, David Watkins, Philip Glamann
For more articles like this, please visit us at bloomberg.com
©2019 Bloomberg L.P.