Can Hong Kong Stocks Sustain Their Record-Busting Rally?

Stocks listed on Hong Kong’s benchmark Hang Seng index hit their highest level in more than a decade on Wednesday. The Hang Seng also closed above the 30,000 mark for the first time in more than 10 years, powered primarily by strong earnings performance and remarkable gains posted by a single tech stock.

However, some analysts are already questioning the sustainability of the current rally. A section of market watchers have characterized the rally as a “narrow” one, saying that it has been powered solely by tech stocks. Others point at the troubles hurting China’s economy which could soon spill over into its equity markets.

Tencent Powers Hong Kong’s Rally

The Hang Seng’s spectacular rally has primarily been fuelled by China’s tech behemoth Tencent Holdings Limited (OTC:TCEHY) . Earlier this week, Tencent exceeded Facebook, Inc.’s (NASDAQ:FB) market capitalization for a short while. Shares of Tencent have surged more than 125% year to date, contributing toward more than a third of the Hang Seng’s advance during the same period.

Additionally, Tencent also became China’s first tech company to attain a market capitalization of more than $500 billion this week. The reason for Tencent’s gains is not hard to seek. Strong earnings have been driving the tech major higher, a theme which can easily be extended to explain the success of the Hang Seng as a whole.

Earlier in the month, Tencent posted a strong third-quarter results. The tech behemoth’s income surged 57% on a yearly basis to $3.43 billion. Though the stock has slipped marginally in Thursday morning’s trade, it is still up 8.9% over the last five days. Tencent has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Strong Earnings, Late Entry into Global Rally Fuel Gains

Skeptics of the Hang Seng’s current rally have taken the view that funds are crowding into only a few select stocks. This is not a favorable outcome for investors with an active approach. Further, the rally seems to be primarily tech driven. Some market watchers have also pointed toward the problems plaguing China’s economy which could spoil the markets’ party soon.

However, a cursory look at some of the largest stocks listed in Hong Kong reveal a slightly different story. Melco Resorts & Entertainment Limited (NASDAQ:MLCO) and Cathay Pacific Airways Limited (OTC:CPCAY) , both primarily travel and leisure stocks, are up 67.1% and 17.1%, respectively, year to date. It is true that the bulk of the rally’s profits have been accrued by tech stocks, but gains have not been as narrow as some analysts believe.

More importantly, China’s stocks are a late entrant into a global rally. The country’s equities have had to give up on gains for an extended period since investors were earlier wary of betting big bucks because of the country’s economic problems. Further, China’s tech stocks are much better value propositions than their counterparts in the U.S.

Conclusion

Hong Kong’s equity market is enjoying a strong run of gains this year. Though some analysts are questioning the sustainability of the rally, it is probably set to continue given the strong earnings performances posted by some of the region’s major tech behemoths and stocks’ reasonable valuations.

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