Hong Kong stocks may look like an attractive bargain but approach the market with caution, say strategists, as it's caught between the double threat of higher U.S. interest rates and increasingly soft economic conditions in China.
After suffering a sharp sell-off this summer, the market is trading at nine times price-to-earnings (PE), its lowest in over three years, and making Hong Kong stocks some of the cheapest in the world. By comparison, China's Shanghai Composite and the U.S. S&P 500 are trading at PE ratios of 13.3 and 18.4 respectively.
"Hong Kong stocks are trapped between the U.S. and China," said Uwe Parpart, managing director and head of research at Reorient Financial Markets.
"In the U.S., there's a rate hike threat, which is especially bad for Hong Kong property stocks," he said. Property, financial and mainland Chinese companies dominate the Hang Seng Index, which is down 10.5 percent so far this year.
The Hong Kong dollar's peg to the U.S. dollar means that the territory's interest rates are effectively linked to those set by the Federal Reserve. Rising interest rates are expected to weigh heavily on Hong Kong's property market, which has been buoyed by near-record low borrowing costs and excess liquidity in recent years.