While Japan, Taiwan, and South Korea dominate the market spotlight, Hong Kong has been languishing since the start of the year. The Hang Seng is down 10%, placing it at the back of the pack among major global indices.
The Hong Kong Stock Exchange is going through a rough patch. Recording its seventh session of decline in eight days this morning, the Hang Seng Index has fallen back to its lowest level in a year. This decoupling is all the more striking given that mainland Chinese indices are holding up relatively well. And what of its regional neighbors? Since the beginning of June, the Nikkei has climbed 9%, the Kospi 5%, and the Taiex 2.85%. Meanwhile, the Hang Seng has suffered a heavy retreat of more than 8%.
The Fallen Angel
For generations born before the 1990s, Hong Kong long embodied the only viable gateway for investing in Asia. While Chinese growth was in full swing, comparisons with other regional financial centers made the choice obvious.
Japan, first of all, was then sinking into a multi-year crisis. After the bursting of the real estate bubble, only the hardware sector still supported the economy. It was the golden age of gaming consoles and consumer electronics. Yet, while Pokemon delighted enthusiasts, the archipelago failed to reassure investors: the country was lagging significantly in the digital transition just as the world was shifting into the internet era.
Further south, Korea had not yet achieved the status of a cutting-edge technological player that we know today. It was primarily known for its large family conglomerates, specialized in components or entry-level products. The sudden halt came in 1997: the economy collapsed, necessitating an emergency intervention by the IMF and a massive bailout plan.
Faced with these two uncertain trajectories, foreign investors unhesitatingly chose Hong Kong. Far from being a default choice, the financial center established itself as the essential hub for Westerners to bet on tech and the Asian future.
Recently, the situation has reversed: Korea and Japan have become increasingly attractive while China has lost its luster. While the trend has existed for several years, it has accelerated recently with the unwavering investor enthusiasm for AI.
The AI Effect Benefits Neighbors, Not Hong Kong
If the Japanese Nikkei, the South Korean Kospi, and the Taiwanese Taiex are outperforming, it is thanks to their heavy exposure to artificial intelligence. Investors who bet on AI infrastructure and memory chips are well-acquainted with these giants: Samsung, TSMC, SK Hynix, Nec, and Advantest.
Unfortunately, none of them are included in the Hong Kong index. Despite being rich in tech stocks, the financial center is struggling to remain globally competitive. While giants like Baidu or Alibaba are indeed developing their own artificial intelligence models, their ambitions remain constrained by a double obstacle: market distrust toward China and US restrictions on access to cutting-edge Nvidia chips.
To make matters worse, economic indicators for May confirm the prevailing gloom in mainland China. Retail sales are contracting year-on-year. Lacking confidence in the future, households are cutting spending and saving massively. Meanwhile, the real estate sector, which carries significant weight in the index, still shows no signs of recovery.
In the US, the Pentagon added fuel to the fire by placing several Chinese heavyweights, including Alibaba, Baidu, and BYD, on its blacklist of companies suspected of ties to the Chinese military. Despite denials from Alibaba, the stock was immediately penalized with a 1% drop at the close.
The Hang Seng: For Contrarians
Today, if you go to a gathering of tech-obsessed investors and present your portfolio, explaining that to play tech, you are investing in the Hang Seng, you will be met with strange looks.
The performance of the Korean, Japanese, and Taiwanese exchanges, driven by the big winners of AI, seems to have totally eclipsed China in the eyes of fund managers. The Hang Seng is the primary victim of this brutal rotation, creating an opportunity for investors who like to take a contrarian view of the market.
