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Tech index rise hints at bright spots in China economy
Constituent stocks benefiting from ‘consumption downgrade’
Bayani S. Cruz 14 Sep 2023

The technology and consumption sectors offer bright spots in the slowing Chinese economy based on the outperformance of the Hang Seng Technology Index (HS Tech).

The index, which represents the 30 largest technology companies listed in Hong Kong that have high business exposure to technology, is expected to continue outperforming until the end of the year. This may be surprising to many investors because HS Tech is historically a high-beta index, which means it is expected to underperform when the Hong Kong stock market is down.

The Hang Seng Index (HSI), the parent index, has dropped by 10.6% year-to-date as of September 12 and is expected to be flat towards the year-end. But the HSI Tech has outperformed by 3.4% year-to-date as of September 12 and by 46% from October 25 2022, its lowest level in 12 months.

On a year-to-date basis adjusted for the US dollar, the HS Tech is actually one of the best performing major indices across the Hong Kong and mainland China compared to HSI, Hang Seng China Enterprises Index (HSCEI), CSI 300 and CSI 500.

The reason is, despite its name, Hang Seng Tech is more than just a technology index.

“HS Tech has more to do with consumption than technology because many of the constituents within HS Tech are heavily exposed to internet spending,” Jason Lui, head of APAC equity derivatives strategy at BNP Paribas, says at the bank’s global outlook briefing for Q4 2023. “In that sense, they are benefiting from some of the recovery in the consumption spending. And we see that happening in the earnings. Within the HS Tech stocks, we’ve actually seen some rebound of earnings estimates, which is quite encouraging.”

Exposure to property

Lui explains that the difference in the performance of the HSI and HS Tech is their difference in weighting or exposure to the financial and property sectors. The HSI has a much bigger exposure to financials and the property sector, which has been performing poorly.

“As we know this year, financials and property are under quite a bit of pressure. We noticed that over the past week, we’ve seen some weak and unexpected earnings on the land auction results in Hong Kong on the property side. We have also seen some of the banks under pressure when it comes to the net interest margin and their exposure to some of the risky loans as well. So that kind of drove the divergence between Hang Seng Tech and Hang Seng Index. And that is why we like Hang Seng Tech because it has less to do with the banking side of things and really focuses on consumption spending which is a key priority for the government,” Lui says.

One of the major phenomena in the Chinese economy is “consumption downgrade”, which means the local population is being forced to spend more of their disposable income domestically instead of overseas.

“Because over the past few years the household income has suffered due to a variety of economic headwinds. But there’s really some very interesting by-product of consumption downgrade. For example, instead of flying to Paris and Milan to buy products, they go to Hainan Island. Instead of going skiing in Japan, they go to northeast China. That means they end up containing some of the spending domestically,” he says.

Consumption boost

Because of this trend, companies focused on consumption and domestic tourism, including technology-consumption-related companies, are expected to outperform in the medium term to long term. These companies are also expected to benefit from new structural reforms designed to address issues in these sectors.

“Over the long term, perhaps over the course of 2024, we believe some of the onshore small cap companies should outperform because over the past month, we have seen a whole series of structural reforms announced by the CSRC (China Securities and Regulatory Commission) that are aimed to combat some of the structural issues in China when it comes to the primary market and secondary market practice,” Lui says.  

In the same briefing, Luigi Speranza, global head of Markets 360 and chief economist at BNP Paribas, says the global economy is expected to lose momentum in Q4 2023, with an expected recession in the United States, stagnation in the eurozone, a shallow recovery in China, and tepid growth in emerging markets.

“Headline inflation is looking stickier after a swift decline, but our base case is that the growth slowdown will allow it to return to central bank targets, albeit over a long period and with the risks skewed to the upside,” Speranza says.

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