The Hang Seng index suffered a harsh reversal, falling by over 16% from its highest level this year. It was trading at H$19,445 on Tuesday as investors embraced the new normal of the incoming Trump administration. It was hovering near its lowest level since September 26.
Hong Kong stock risks remain
The Hang Seng index has continued to underperform its global peers as the excitement about China’s stimulus faded.
Beijing has unveiled a $1.4 trillion stimulus package that will see funds flowing to local authorities. Most of these locations have been under intense pressure in the past few years following the collapse of the real estate sector.
While the stimulus was a good thing, analysts worry that the Hang Seng index faces numerous risks. For one, there are signs that the Chinese economy is not recovering as quickly as analysts were expecting.
Hang Seng stocks have also fallen because of the potential return of Trade wars between the United States and China. Donald Trump has already warned that he will add large tariffs on Chinese imports.
At the same time, he has appointed Marco Rubio to become the next Secretary of State. Rubio belongs to the old-school orthodoxy of the Republican Party and has been a top China hawk for many years.
Therefore, there is a likelihood that he will promote a tough-on-China approach, which may damage relations.
Trump also warned about higher tariffs for countries in the BRICS group if they work to abandon the US dollar. China is the biggest member in that group.
Additionally, there are concerns that the Hong Kong and Mainland China’s real estate sector has not recovered. Many real estate companies in the Hang Seng index have reported weak financial results lately.
Link Real Estate stock has plunged by over 22% this year, while Wharf Real Estate is down by 38% in the same period. China Resources Land, New World, and Hang Lung Properties stocks have plunged by over 20% this year.
Other companies in the Hang Seng index like China Resources Beer, MTR, Hengan International, Galaxy Entertainment, Sands China, and Chow Tai Fook Jewellery have also been among the worst laggards.
Hang Seng’s technology companies have also underperformed their global peers like Google, Amazon, and Tesla. Li Auto shares have collapsed 40% this year, while Baidu is down by 28.6%.
The best-performing companies in the Hang Seng index were companies like Trip.com, JD, Meituan, and Xiaomi, which have jumped by double digits this year.
Hang Seng index technical analysis
The daily chart shows that the Hang Seng index has been in a strong bearish trend in the past few weeks. It has crashed by over 16% from its highest level this year, and is hovering near its lowest level in months.
The index has also dropped below the 38.2% Fibonacci Retracement level and the 50-day Exponential Moving Average (EMA).
On the positive side, it has formed a falling wedge chart pattern, a popular bullish reversal sign. A wedge is made up of two falling and converging trendlines. In most periods, a bullish breakout happens when the two lines are nearing their confluence.
In this case, a strong bullish breakout will push the Hang Seng index to the next key resistance level at H$20,000. A break above that level could push it much higher, potentially to the psychological level at H$22,000.
On the flip side, a drop below the lower side of the wedge at H$19,000 will point to more downside, with the next points to watch being at H$18,000.
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