Hong Kong’s Worst Sector in 2018

Nearly all industry groupings on the Hong Kong Stock Exchange declined in 2018. One, though, slid further and harder than all the rest. Let’s identify this culprit and see if there’s been any improvement so far this year.

Lows and high

To put it delicately, 2018 was not a banner year for the Hong Kong Stock Exchange — it dropped by nearly 14% during that time.

Macroeconomic factors were, of course, big contributors to the decline (trade wars with the U.S. tend to do that). We can also point the finger at volatility in certain big equity markets abroad, like the New York Stock Exchange.

The sector hit hardest by this slump was information technology, which lost 29.6% of its value across 2018. It came in just a tiny bit behind the materials sector, which was 29.5% in the red. Three other groupings suffered 20%-plus losses in the year, namely consumer goods (27.1%), consumer services (22.6%), and industrials (20.9%).

Why IT suffered most

There are two key reasons for the underperformance of the Hong Kong IT sector in 2018. First and foremost is, yes, the trade dispute. Much of the conflict between super economies China and the U.S. centered on IT companies.

Perhaps most notably, Hong Kong-listed but mainland China-headquartered ZTE, one of the top telecom equipment and systems companies in the world, had a rough year. In 2017, the company admitted to violating U.S. trade sanctions. The following year, the U.S. Department of Commerce essentially imposed a seven-year ban on ZTE buying goods from U.S. corporations, although this was quickly rescinded. Nevertheless, this shaky relationship between the company and American regulators made investors skittish about the stock.

The second big factor was that the IT sector had a smashing 2017; in fact, it was the best-performing industry grouping by far. The sector grew by a red-hot 92% over that year, nearly double the growth rate of its nearest competitor (consumer goods, which rose by just over 51%).

The Hong Kong exchange benefitted mightily by the overperformance of what’s now its top company by market capitalization, the mainland-headquartered Tencent Holdings (SEHK:700) (its King of Glory mobile game was a monster hit). IT’s robust performance in 2017 made it a hard act to follow the next year.

Dead-cat bounce?

The night-and-day performance of the IT sector over the preceding two years makes it challenging to predict how it’ll fare in 2019. So far, the atmosphere seems to be better – Tencent Holdings stock is up by nearly 17% year to date, while that of China Mobile has already improved by 16%.

But how such stocks ultimately fare will depend on how the China-U.S. trade negotiations go, and of course on the fundamental performance of the big IT players on the Hong Kong market.

Thankfully, the outlook for both looks good for the remainder of this year. Both sides seem to be softening in the trade dispute, and mobile in particular remains a hot area for the industry.

We should never blindly follow trends, however. So whether the Hong Kong IT sector grows or slows this year, let’s make sure we’re investing in its companies for the right reasons (we like their fundamentals and their potential) rather than the wrong ones (everyone else is doing it).

Either way, let’s hope IT won’t repeat as the biggest loser when 2019 comes to a close.


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HK MoneyClub (www.hkmoneyclub.com)