What will happen with Hong Kong’s wave of IPOs in light of the stock market rout?

Hong Kong’s stocks start the new year with a market rout, extending the prolonged disappointment. Its charm was once supported by a strong China growth story, but the weak sentiment has battered initial public offerings (IPOs) to the lowest level since 2001. As China rolls out more measures to stabilize the market, including a RRR cut and the rumored state-led share purchases, we analyze if this is enough for Hong Kong's IPO activities and sentiment to rebound in 2024.

Despite the pessimism, a few factors may comfort Hong Kong’s market sentiment. Although there is uncertainty about the pace of rate cuts, global monetary condition will ease in 2024. Hong Kong's sentiment may be weaker than other Asia markets, but it has not translated into capital flights, as shown in the largely stable aggregate balance and monetary base. On the corporate level, the price-to-earnings (P/E) ratio and dividend yield have reached a low level versus the historical average.

Although the sentiment may not fall further from the floor, we cannot ignore the risks that there can be ceilings to improvement.? Our Natixis Asia Market Sentiment Indicator shows the market’s view on China-related assets is stuck a low level with neither improvement nor significant deterioration. The market expects the earnings of Hong Kong's listed firms to grow slower than last year versus APAC (ex. China), showing the impact of regulatory tightening. Geopolitical risks will linger through further trade and investment restrictions. Hong Kong may struggle to reidentify its investment themes beyond real estate and internet platforms. It has been lagging other Asia markets, such as the growth story in India, the better return of capital in Japan and the tech-savvy markets driven by artificial intelligence in Taiwan and Korea.

The bottom line is how willing China is to stimulate the economy, support the market, and develop a clear mechanism for approving overseas listings. With the belated RRR cuts, there is more certainty in government’s support on the economy, but this may not be enough. If there are more signs of certainty in 2024, it is possible to see an improvement in Hong Kong's IPO activities and market sentiment.

* Full list of opeds together with other publication summaries can be found at Substack (https://aliciagarciaherrero.substack.com/ ).

* Full report is available for Natixis clients.