Hang Seng Index Mid-Year Outlook: Will the Rollercoaster Ride Continue?

Hang Seng Index first half of 2023 Recap

The Hang Seng Index had a strong start in 2023, continuing the robust upward trend that began in last November. It recorded a monthly gain of 10.4% and a cumulative increase of nearly 50% over the past three months. However, the first month of the year turned out to be the best performance for the Hang Seng Index in the first six months of the year.

Since then, the Hang Seng has entered a rollercoaster-like period of intense volatility. In February, the index ended the month with a loss of 9.4%, making it the worst-performing month so far this year. The selling pressure further intensified In March as China's announced yearly growth target fell short of expectations. Additionally, the banking crisis in the United States added to the market turmoil. As a result, the Hang Seng Index dropped below the 19,000-point mark for the first time this year.

Entering the second quarter, concerns about the pace of China's economic recovery became prominent. Faced with a series of underwhelming economic data releases, the Hang Seng Index traded at its six-month-low level.

By the end of May, the Hang Seng Index experienced a sudden turnaround after touching the technical bear market territory. The anticipation of Chinese government’s potential economic stimulus measures began to fuel optimism. As a result, after reaching its lowest point of the year at 18,019 on June 1st, the Hang Seng Index swiftly rebounded and approached the 20,000 level within two weeks.

In terms of the sectors, as of May 31st, the healthcare and real estate sectors lagged behind in performance. On one hand, the cooling of the healthcare sector can be attributed to the easing of the pandemic situation. The lackluster performance of the real estate industry indicates that the post-pandemic reopening in China has not has not been able to bring about a fundamental recovery in this troubled sector. Additionally, the underperformance of consumer stocks suggests a lack of domestic demand in both Hong Kong and China's economy. On the other hand, the communication and energy sectors have been the top performers so far this year.

Hang Seng Index Second half of 2023 Outlook

After a turbulent first half of the year, the Hang Seng Index is likely to benefit from two upcoming catalysts in the remaining months of the year.

Firstly, China's economic boost is expected to play a crucial role. The growth target for China's economy in 2023 is set at 5%. However, the GDP growth in the first quarter was only 4.5%, and the data released for the second quarter so far has generally been below expectations. That is to say, China will need to exert more effort in the second half of the year to achieve its annual economic target. In this context, the much-needed Chinese economic stimulus policy has the potential to serve as a significant support for the market to the latter half of the year.

Furthermore, The global inflation crisis and the accompanying monetary tightening measures may gradually enter their final stages. Although the Federal Reserve has indicated that rate hike journey is not yet complete, it is evident that we are approaching the final stages, with a potential shift in focus may occur any time in the second half of the year. While we may not see an actual interest rate cut cycle, central banks may begin signaling a shift toward a more accommodative stance, which should be welcomed by the market participants.

In terms of the risks ahead, it is prudent to avoid excessive optimism regarding China's economic boost plan. A series of data released in the first half of the year highlighted several fundamental challenges confronting the Chinese economy, which cannot be resolved overnight. One major concern is the insufficient domestic demand. The rapid cooling of domestic consumption following the relaxation of pandemic restrictions indicates a lingering chill on consumer confidence that is difficult to recover from. This issue is further exacerbated by deeper declines in population growth and a surge in youth unemployment rates. As a result, it will be crucial to closely assess the effectiveness of Chinese government’s policies to fundamentally revive the world's second-largest economy.

Hang Seng Index Technical Analysis

From the perspective of the Hang Seng Index's trend, it faces two possibilities in the near term. The first possibility is that it continues the upward trend since the end of May, supported by the downtrend line established at the beginning of the year. If it manages to break through and stabilize above the 20-day moving average, it could regain the key psychological level of 20,000. After that, a major challenge in view lies around the 21,000 level, as the index has previously failed to surpass it multiple times since February. It will be crucial to watch this level if Hang Seng could sustaining the upward momentum to the second half of 2023.

The second possibility is that the Hang Seng Index reverses its direction from the June high and forms a new downtrend line (represented by the dashed line in the chart). In this scenario, the first support to monitor would be the 50-day moving average. If the index continues to decline and breaks below this average, the possibility of a retracement to the May low cannot be ruled out.