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Hong Kong stocks stuck between a 'rock and a hard place' for 2019

Key Points
  • Hong Kong's stock market faces continued headwinds in 2019, analysts and investors say.
  • The outlook for the benchmark Hang Seng Index is largely bearish due to a list of concerns including a slowdown in China's economy and the trade war with United States.
  • IPOs have been a bright spot in 2018, with consultancy KPMG saying Hong Kong is on track to regain its top ranking.
A panel displays the closing Hang Seng Index outside a bank in Hong Kong, China November 2, 2018. 

Hong Kong stocks are closing out a rough year and the outlook for 2019 remains largely negative, according to analysts and investors.

Headwinds from a weakening economy in China, the Beijing-Washington trade war, concerns about signs of emerging U.S. weakness and an expected slowdown in local initial public offerings after a banner 2018 are seen as likely to weigh on the market.

The benchmark Hang Seng Index closed Friday at 26,094.79, down about 13 percent for the year as the end of 2018 approaches. It has slumped some 22 percent from its peak of 33,484.08 on Jan. 29.

"I would say it's between a rock and a hard place," Hao Hong, managing director and head of research at BOCOM International in Hong Kong, told CNBC earlier this month about the outlook for the market.

Hong cited the expectation of a broad slowdown in China's economy during the first half combined with volatility on Wall Street in the U.S., where less aggressive interest rate hikes by the Federal Reserve underscore worries growth in the world's largest economy is waning.

Hong said the Hang Seng is clearly in the process of finding a bottom, but added: "I don't think people should be hoping for a V-shaped rebound in the market."

Hong Kong, a semi-autonomous former British colony over which Beijing resumed control in 1997, is a major trade and financial services hub vulnerable to the whims of larger economies, given its proximity to China and the Hong Kong dollar's peg to the U.S. currency.

"Hong Kong ... is vulnerable to further escalating U.S.-China trade tensions, possible disorderly tightening of global financial conditions, slower-than-expected growth in Mainland China, and a sharp housing market correction," the International Monetary Fund said in a statement last week at the conclusion of regular consultations with local authorities.

Citi, in a report dated Dec. 5, said it expects Hong Kong banks to underperform the broader market next year as weak credit demand suppresses earnings and on concern over potential for capital outflows.

Ronald Wan, non-executive chairman at Partners Financial Holdings, suggested that a breakthrough in the tariff conflict in the form of China opening up key business sectors to meet U.S. demands is unlikely, while China's economic growth is set to slow.

"I think the market will be even more challenging," he said on Dec. 6 of next year's outlook for Hong Kong.

'Still in trouble'

Mark Jolley, strategist at CCB International, sees the Hang Seng breaking below 20,000. "We're bearish," he said earlier this month, predicting "downward earnings revisions, which will be the key driver of the market over the next six to nine months."

The Hang Seng's performance this year, while gloomy, masks some bright spots.

It was a stellar year for attracting IPOs under new listing rules that include allowing companies coming to market to issue shares with weighted voting rights, though the practice has drawn criticism.

Consultancy KPMG estimated on Tuesday that Hong Kong is set to regain its top global IPO ranking in 2018 with companies likely to have raised about HK$300 billion ($38.4 billion), more than double last year's total.

Helping boost the figure were high-profile listings by mainland Chinese companies, notably smartphone maker Xiaomi, which utilized weighted voting rights, and mobile phone infrastructure builder China Tower. Both are among Hong Kong's 10 biggest ever IPOs, according to Hong Kong Exchanges and Clearing, the market operator.

And while KPMG expects IPO interest to remain strong, fundraising is likely to slow to a figure somewhere above HK$200 billion, it said.

Despite Hong Kong's challenges, some are guardedly hopeful.

Jackson Wong, associate director at Huarong International Securities, said that the Hang Seng could claw back to 30,000, citing optimism inspired by the agreement for a 90-day ceasefire on new tariffs between presidents Donald Trump and Xi Jinping.

What is needed, Wong said, is China finding substitute buyers in Europe and emerging markets for its tariff-hit products and some sort of deal with the U.S., even if it doesn't solve all the outstanding issues.

Hong Kong, he said, is depending on it.

"If China cannot figure a way out of this, we are still in trouble," he said earlier this month.