UBS Capitulates, Slashes Hang Seng Forecast
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As China devalues yuan and the U.S. is on track to raise rates, Hong Kong, whose currency is pegged to the dollar, is in trouble.
Forecasting “black sky”, UBS now sees the Hang Seng Index to end the year at 19,775, another 5.5% downside from its current level. The Hang Seng Index has fallen by about 25% since its late April high.
Apart from China slowdown, “we have seen a combination of the three pillars of Hong Kong’s economy weakening (tourism and re-export) or showing signs of weakness (property),” wrote Spencer Leung.
The Hang Seng Index is now valued at only 9.4 times forward earnings, a good 0.8 times standard deviation below its 2-year average, but “the current valuation of Hong Kong equity may not be attractive enough to compensate for potential earnings downside.” UBS estimates Hong Kong companies’ earnings could drop 31% next year.
It is not easy for retail businesses to operate in Hong Kong, because the rent is simply too high. UBS estimates that ground-level stores in prime shopping districts in Hong Kong will have to see their rental expenses drop 70% from their peak to break even. Last week, U.S. handbag bag Coach closed its flagship shop in the Central shopping district.
Overnight, the iShares MSCI Hong Kong ETF rose 0.5%.
Questions & Answers
Q.What factors has UBS identified as contributing to Hong Kong's economic difficulties?
What factors has UBS identified as contributing to Hong Kong's economic difficulties?
UBS highlighted that the three main pillars of Hong Kong's economy, namely tourism, re-export, and property, are either weakening or showing signs of weakness. These factors, alongside China's slowdown, are creating economic trouble.
Q.How much lower does UBS expect the Hang Seng Index to fall by the end of the year?
How much lower does UBS expect the Hang Seng Index to fall by the end of the year?
UBS now forecasts the Hang Seng Index to end the year at 19,775. This represents a further 5.5% downside from its current level, following a 25% drop since late April.
Q.What does UBS say about the current valuation of Hong Kong equities?
What does UBS say about the current valuation of Hong Kong equities?
The Hang Seng Index is valued at 9.4 times forward earnings, which is below its 2-year average. However, UBS believes this valuation may not be attractive enough to offset potential earnings declines for companies next year.
Q.What is the scale of rental cost reduction needed for ground-level retail stores in Hong Kong?
What is the scale of rental cost reduction needed for ground-level retail stores in Hong Kong?
UBS estimates that rental expenses for ground-level stores in prime shopping districts would need to drop by 70% from their peak. This reduction is necessary for these retail businesses to achieve a break-even point.
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