Hong Kong stocks made a bullish comeback on Thursday as local and foreign investors continued to scoop cheap stocks. The benchmark Hang Seng index rose by more than 2.80% on Thursday and is now hovering near its highest level since September. It has rallied by more than 33% from the highest level this year.
Is it safe to buy Hong Kong stocks?
The Hang Seng index has underperformed its global peers this year. It has crashed by over 25% while indices like the Dow Jones and S&P 500 indices crashed by less than 20%. These stocks are contending with several challenges.
China and Hong Kong have been major holdouts when it comes to Covid-19 lockdowns. While most countries seem to be moving past Covid, they have placed significant restrictions. Some of these restrictions include quarantines for arrivals and negative tests to access various places.
The Hang Seng index has recovered because of signs that China is on the path to end these restrictions. This week, officials removed some testing and quarantine restrictions in Mainland China. The situation accelated after China unveiled weak November trade numbers.
A few months ago, I wrote that the Hang Seng was a good buy for the brave. I noted that many constituents have become dirt cheap in the past few months. A good example is a company like Alibaba whose shares have collapsed by 72% from its all-time high. It has a market cap of $233 billion while Amazon is valued at close to $1 trillion. In the past, Alibaba used to be more profitable than Amazon.
The same undervaluation is seen in other technology companies like Jd, Tencent, and NetEase. Real estate companies like Longfor Properties, Henderson Land, Country Garden, and New World got oversold amid the collapse of Evergrande.
In all, Hang Seng index has a PE ratio of 11 compared with the S&P multiple of 20. Therefore, this means that the index has more room to run to close this gap.
Hang Seng forecast
The daily chart shows that the Hang Seng index has been in a strong bullish trend in the past few weeks. It has managed to move above the 50-day and 100-day moving averages, which is a positive thing. The index also rose above the important resistance levels at H$18,485 and $18,272.
At the same time, the Relative Strength Index (RSI) has moved close to the overbought level. Therefore, the index will likely continue rising as buyers target the key resistance level at H$20,000. This is in line with my previous Hang Seng forecast. A drop below the support at H$18,500 will invalidate the bearish view.
