The Hang Seng Index (HSI) reached its lowest point in 2018 on Wednesday morning (9/12), pushing more than 20% below its peak on January 26.
Trade-war fears, emerging-market (NYSEARCA:EEM) contagion concerns, and the slowing down of China’s economy all played (and continue playing) significant roles in the HSI’s decline as the country’s stock market struggles to find solid ground. The following chart from Bloomberg allows us to visualize those struggles. The captured price of 26,345.04 marks a 20.5% decline from its peak of 33,154.12. Most definitions of a bear market include a 20% decline from highs.
The White House recently announced that its planned tariffs on $267 billion worth of Chinese imports were all set and ready to go, meaning a whole lot more instability in the global trade realm could be coming. The tariffs are bringing Hong Kong down because several of the largest companies listed on the HSI are based in China, and tariffs could potentially impact those companies.
Funds have been fleeing from emerging markets recently. Bloomberg reported that outflows from emerging-market funds have hit Asian stocks particularly hard for several reasons, a key one being that China makes up the largest part of the MSCI emerging-markets index and Hong Kong also makes up a large part. The iShares Emerging Markets ETF (EEM) has a 4.20% allocation to Hong Kong stocks, making it the seventh-largest allocation. Fears of contagion stemming from countries such as Turkey and Argentina, which are experiencing economic turmoil, have caused investors to sell emerging-market funds and move into assets less likely to be affected by the unpredictability of the frontier nations. Hong Kong was swept into the bucket of emerging-market countries that witnessed sell-offs due to such contagion fears. Emerging markets are less favorable when such topics as global trade war are in the foreground.
Lastly, China’s economy is playing a large role in the movement of Hong Kong stocks. As previously mentioned, some of the HSI’s largest constituents have significant business and are domiciled in China, so any indication that China’s economic growth is slowing is bound to affect indexes in Hong Kong.
The prospect of a global trade war persists and continues to pressure markets in the Asian region and around the world. Emerging markets have wholly suffered as a result of turmoil in individual countries, fears of contagion, and large-scale sell-offs as investors seek more stable assets amid the geopolitical uncertainty. Since Chinese companies play a large part in the Hang Seng Index, any negative economic news in China pushes the HSI down further. Given the current environment, the Hang Seng Index, and Hong Kong as a whole, is expected to continue struggling as long as the current global tension remains.
Sectors: Among the Sector Benchmark ETFs, the average momentum score decreased from 16.73 to 12.82. The sector scores were mainly negative for the week. Utilities (NYSEARCA:XLU) and Consumer Staples (NYSEARCA:XLP) increased the most, up 4 points. Technology decreased the most, down by 13 points. Technology continues to be the leading sector at 28, followed by Health Care at 27 and Discretionary at 23. Materials, Telecom, and Energy were at the bottom of the rankings. Nine of the 11 sectors are “in the green.”
Factors: Among the Factor Benchmark ETFs, the average factor score decreased from 19.75 to 14.67. The scores were mainly negative for the week. Yield increased the most, up 3 points. High Beta decreased the most, down 12 points. Low Volatility leads the factors, while High Beta continues to remain at the bottom. All 11 factors are still “in the green.”
Global: Global Benchmark ETF momentum scores decreased from -9.36 to -19.82. Global areas had generally negative results. The USA was the only global area that did not decrease. Latin America lost the least amount, down 1 point for the week. China had a steep plummet, down 24 points. The USA leads the list, while Emerging Markets, Latin America, and China all remain at the bottom. Only two of the 11 global areas are “in the green.”
Disclosure: No communication by Dynamic Performance Publishing or our employees to you should be deemed as personalized investment advice. Any investment recommended in this newsletter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Dynamic Performance Publishing, its affiliates, and clients may hold positions in the recommended securities. Results are not indicative of holdings for clients of Flexible Plan Investments. Forwarding, copying, or otherwise duplicating this information for the use by anyone other than the intended recipient is expressly forbidden. These results are not representative of those achieved by clients of Flexible Plan Investments, Ltd. (FPI) due to differences in security selection, timing of trades, transaction fees, and FPI’s management fees.