The Hang Seng Index pulled back on Wednesday, even after China published strong economic numbers despite the ongoing trade war with the US. The index, which tracks the top Hong Kong and mainland China companies, retreated by 2.5% to H$20,900, down from this week’s high of H$21,600.
Let’s explore some of the top reasons why the blue-chip Hang Seng Index will bounce back and possibly retest its highest point this year.
China economy is doing well
The first main reason why the Hang Seng Index will bounce back is that the Chinese economy is doing modestly well even as the trade war with the US escalates.
Data released on Wednesday shows that the economy expanded by 5.4% in the first quarter. This growth happened as the country’s consumption rose, with retail sales jumping by 5.9% this year, higher than the median estimate of 4%.
Chinese companies are also increasing their fixed asset investments, which rose by 4.2% this year. This increase also led to a big jump in industrial production, which rose by 7.7% in March, higher than the expected 5.9%.
Therefore, if this trend continues, there is a likelihood that China will beat its 5% annual target for the year.
To be fair, these numbers did not include the recently announced tariffs. Donald Trump has imposed a 145% tariff on goods from China, which may impact trade flows between the two countries.
Still, the strong Chinese numbers will likely draw some foreign investors to the country’s stock market. In this case, the Hang Seng could benefit since it is the easiest way to invest in China.
Read more: China’s March exports hit five-month high as factories rush to outpace US tariffs
Hang Seng stocks exposure to the US
The other reason why the Hang Seng Index may bounce back is that many of its companies have little to no exposure to the United States.
Tencent, the biggest company in the Hang Seng, makes most of its money in China through its ownership of companies like Tencent Games, Riot Games, and Tencent Pictures.
Tencent has access to the US through its partial ownership of companies like Reddit, Roblox, Universal Music Group, and Epic Games, the creator of Fortnite. These companies offer services that have not been tariffed.
The other biggest companies in the Hang Seng Index mostly do their business in China. They include ICBC, China Mobile, China Construction Bank, Bank of China, PetroChina, HSBC, and BYD.
The ongoing trade war will not directly impact these firms. Chinese banks may be impacted if Beijing asks them to lower their interest rates further to boost economic lending.
Hang Seng is undervalued
The other main reason why the Hang Seng Index may surge soon is that it is highly undervalued compared to the US. This undervaluation is because the index went through major outflows as the real estate industry crashed and as Beijing intensified its crackdown against Chinese technology firms.
The Hang Seng Index has a trailing P/E ratio of about 10 and a forward multiple of 9.74. In contrast, the ten-year average is 11.1, meaning that it is cheaper than its historical figures. The index is also cheaper than US indices, with the S&P 500 having a multiple of 21.1.
Hang Seng Index has strong technicals
The other reason why the Hang Seng Index will soar is that it has strong technicals. It has formed an ascending channel, which is made up of a series of higher highs and higher lows. It recently retested the lower side of this channel.
The index sits above the 200-day Exponential Moving Averages (EMA). Therefore, the index will likely continue rising as bulls target the upper side of the channel at H$25,000, up by 18% above the current level. A drop below the lower side of the channel will invalidate the bullish outlook.
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