Improving mainland economic data and hopes for export gains as the U.S. economy recovers have boosted Hong Kong stocks but some players, including Goldman Sachs, are sounding warnings.
Hong Kong shares, the most accessible way for foreign investors to play on China equities, have climbed more than 11 percent since the beginning of July, even as most emerging markets have sold off.
But drivers underlying the gains may stymie the rally as the U.S. economic recovery, and the Federal Reserve's moves to taper its asset purchases, boost interest rates and strengthen the U.S. dollar.
The Hong Kong dollar's peg to its U.S. counterpart likely won't offer the immunity from foreign exchange risks investors are seeking, Goldman Sachs said in a note.
Instead, the rising U.S. dollar – with the Hong Kong dollar riding on its coattails – will tighten financial conditions, weigh asset prices, including property prices and slow domestic demand in the protectorate, Goldman said.
"We expect these potential developments, in turn, to slow earnings growth and compress valuations, thereby constraining equity returns upside," Goldman said, adding it viewed Hong Kong shares as "fairly priced."