Highs and lows for Hong Kong capital markets

The last 12 months have proven tumultuous in Hong Kong. In April 2019, the region’s local government proposed controversial changes to laws that would allow criminals to be extradited to mainland China. The summer was punctuated by demonstrations and clashes between citizens and police that often boiled over.

By November, Hong Kong had officially entered a recession, with total economic activity down more than 3 percent in the third quarter of the year, mainly thanks to collapsing exports and lower consumer spending. Retail sales fell more than 20 percent in the final three months of the year, while visitor arrivals from China plunged by 40 percent. 

Meanwhile, on the Stock Exchange of Hong Kong (HKEX), market history was being made as tech firm Alibaba planned its much-anticipated Asian listing. Though plans to list in June were delayed by the protests, investors’ appetite seemed undented when it finally kicked off the share sale in November: after its record-breaking $25 bn debut on the NYSE in 2014, China’s largest publicly listed company raised close to HK$100 bn ($12.6 bn), valuing the firm at a total of $1.7 tn. 

A year of surprises

The two incidents defined Hong Kong’s capital markets in 2019. Even HKEX’s chief executive Charles Li admitted that the ‘depth of the devastation’ caused by six months of anti-government protests would take some time to get over. All in all, the HKEX shed nearly 15 percent of its value between the end of April and September during the most disruptive period of civil unrest. This came on the back of an already uncertain start to 2019, where a short-lived mean-reversion and recovery from 2018’s downmarket was curtailed by the ongoing trade war between China and the US.

William Tsang, head of research and portfolio manager at Hong Kong-based investment house Chartwell Capital, says he would characterize 2019’s capital markets with the phrase ‘surprise, surprise’. ‘Surprises include the unpredictable changes between positive and negative US-China trade talks, and how a bill proposal from the Hong Kong government resulted in such large-scale social unrest,’ he explains.

The impact of Washington and Beijing trading tariffs and counter-tariffs, import bans and other retaliations was felt keenly by Hong Kong’s corporates. ‘Many export-related stocks that weren’t included at the beginning of the trade war also started to be affected,’ says Tsang. ‘The top 50 stocks in both the Hang Seng Index (HSI) and Hang Seng Mid-Cap Index have more than 85 percent of their revenue generated outside Hong Kong and, alongside other global economic uncertainties, the local political unrest continued to worsen.'

These impacts meant that while the Hong Kong market endured a particularly volatile year, the HSI still managed to gain, closing up 13.6 percent as 2020 began. Tsang adds that by the end of 2019 Hong Kong was once more seen as ‘the world’s largest IPO market’, largely thanks to Alibaba’s float and Dutch drinks producer Anheuser-Busch InBev’s IPO to raise funds for its Budweiser brand on the HKEX in September. That sense of optimism is still felt among listed companies to a degree. Olivia Wang, investor relations director at Yue Yuen Industrial, a Hong Kong-listed Taiwanese footwear manufacturer, still views the HKEX as the right place to be listed. ‘The Hong Kong capital market will stay relevant in 2020, particularly after Budweiser’s gigantic IPO,’ she explains.

She adds that mega-cap companies like US-listed internet giant Baidu, online Chinese travel agency Trip.com and other top e-commerce firms ‘are all eyeing up opportunities to come back to the region to have a secondary listing on the HKEX’ – further testament to the strength of the market. ‘[The HKEX] is still an ideal and efficient platform to raise funds from international capital markets,’ Wang concludes. ‘It will hardly be replaced in a short period of time.’ 

Environmental concerns

Wang also notes that a renewed focus from investors on ESG factors has made a perceptible difference. In May 2019 the HKEX proposed a new guide to corporate reporting on ESG matters, and demanded that companies publish information on several sustainability KPIs as part of their listing requirements. 

At the time, some of Asia’s largest firms pushed back against the proposed changes: the Chamber of Hong Kong Listed Companies, whose members include Tencent and China Mobile, argued that disclosures should be determined by what companies felt was appropriate. Some were also concerned that ESG investing practices were at a somewhat early stage in the region: the US and Europe still account for 80 percent of the world’s sustainably managed assets, and Japan a further 6 percent. 

Nonetheless, the new rules became a requirement of listing on the HKEX in December, with any company whose financial reporting starts on or after July 1, 2020 obliged to adhere to the new regime. For Gabriel Wilson-Otto, head of stewardship for Asia-Pacific at BNP Paribas Asset Management, the change will form part of a shift that will see regulation favor engagement over merely disclosure on ESG issues. ‘

One problem is that because ESG disclosure has been a regulatory requirement, many firms have treated it as a compliance exercise rather than a strategic move,’ he explains. ‘I like framing it as a shift from a compliance-driven engagement to a strategic engagement with ESG. If we can think about, for example, climate change and the potential risks, we can disclose the amount of carbon emissions or coal held in portfolios. That was something brewing in 2019 that will continue to impact 2020.’

Tsang also believes this is a trend that will continue this year. ‘The new guidelines explicitly point out ESG reporting as a mandatory responsibility for the board to disclose its oversight, approach, strategy and progress reviews on ESG-related issues,’ he explains. ‘That means a formal ESG governance structure will be required and the new rules will place specific demands and technical requirements in terms of reporting deadlines, board responsibilities, data management and increased disclosure of ESG policies and strategies.’

Last year also saw a bit of a battle as countries in South East Asia and Greater China – including Hong Kong, Singapore and Tokyo – competed to become Asia’s green finance hub. ‘There’s a recognition that if you want to be a leading finance center, you have to be a leading green one,’ says Wilson-Otto. ‘We’ve seen the mainstreaming of several green products and several jurisdictions taking a more co-ordinated approach to developing their green finance standards and capabilities.’

Changes in Hong Kong have further stirred the sustainability waters on the mainland: the China Securities Regulatory Commission is set to introduce mandatory ESG disclosure for listed companies in 2020, and there’s also ‘potential talk of a stewardship code’ there, says Wilson-Otto, alongside Japan’s drafted changes for its own code and Malaysia’s consultation over a wider green finance taxonomy. 

Key issues ahead

For Tsang, this new focus is unlikely to detract from the key issues facing Hong Kong’s capital markets. On a global level, the ongoing impact of the US-China trade talks will continue to be felt – or possibly even escalated – by this year’s US presidential election. 

There could also be a rebalancing of a top-heavy market. ‘I expect activities to increase between listed companies and existing or potential investors, especially among small and mid-caps because they need to attract more liquidity and investors,’ Tsang explains. ‘It is partly due to the Hong Kong stock market being extremely top-heavy that the top 100 largest stocks in the exchange account for 70 percent of its average daily trading value.’

Locally, there are the 2020 Hong Kong legislative elections to come, which will play a key role in determining the future social and economic stability of the city-state. China may also be poised to transform its policy on Hong Kong, given the unrest, and the likelihood that the ‘one country, two systems’ doctrine could come under further scrutiny. For the territory’s capital markets, and its people, a return to business as usual would be welcomed.

This article was published in the Spring 2020 issue of IR Magazine.