Outlook 2025: What’s on the horizon for the Hang Seng Index?

Hang Seng Index unwinding its outperformance into year-end

This year is thought to be a turnaround year for the Hang Seng Index (HSI), but doubts on the recovery prospects for Hong Kong's markets have resurfaced lately, following the lack of a more direct fiscal injection into China’s economy and the looming Trump 2.0 administration in the US. The index had its chance to shine in September this year, where it briefly outperformed the S&P 500, but it has since retreated more than 16% from its two-year high.

“Value play” reflects reservations over the recovery in Chinese economy

Thus far, its price-to-earnings ratio continues to trade below its 10-year historical average. While the index may continue to be framed as a “value play”, failure to sustain a higher valuation also reflects market reservations over the recovery in the Chinese economy.

There are still a lot of moving parts currently, with questions around whether further improvement in economic data can be sustained in the absence of a stronger fiscal injection, along with how China may manage upcoming US economic pressures. Recent corporate earnings continue to surprise on the upside (eg. Tencent, Alibaba), but macroeconomic conditions and geopolitical risks remain the overlying theme. These ought to be addressed in the coming year in order to drive a more meaningful valuation re-rating.

Anticipation remains for strong fiscal boost to lift confidence

Since late-September this year, the People’s Bank of China (PBOC) has rolled out a series of measures to stimulate the economy, which includes key lending rate cuts, liquidity injections through reserve requirement ratio (RRR) cuts and lowering mortgage rates on existing home loans.

While some degree of monetary policy success may be reflected in October through stronger retail sales, slower new home prices’ decline and improving Purchasing Managers' Index (PMI) numbers, the risks are that the recovery momentum may fizzle off in the likes of April 2024 without stronger fiscal efforts. One may note that there are still underlying deflationary risks from recent inflation data, weak external demand from China’s new export orders and contraction in home prices having a negative wealth effect, which creates an uneven recovery backdrop.

Slower growth expected in 2025 and 2026

Looking to 2025, Refinitiv estimates are pointing to a continued slowdown in China’s growth, with below-trend growth of 4.5% next year (4.8% in 2024), before further slowing to 4.3% in 2026. This may mark a divergence from other parts of the world, where Eurozone, UK, Australia, Canada, Japan are all expected to see a recovery, and that could continue to see investor capitals leaning into these markets.

Things may get worse before it gets better?

Reference from the 2018 trade war seems to suggest that things could get worse before it gets better, as we are likely to enter another phase of tit-for-tat retaliations, which may make it difficult for the two nations to reach a resolution in the near term. US President-elect Donald Trump has floated the idea of a 60% tariff on all Chinese imports into the US, while China is unlikely to back down with its emphasis on “mutual respect” and will likely take action to remind the US that any moves against China will come with consequences.

That said, we may expect drawdown in Chinese equities to be more limited this time round. This is because of declining China’s exports to US over the past years, “bolder steps” in stimulus next year to mitigate any US economic pressures, some pricing already in place for tariff risks and measures of capital market support in place (eg. special re-lending facility, state fund purchases).

Reference from 2018 suggests that the peak of trade tensions may mark a near-term bottom for Chinese equities (late-October 2018), where negotiations stalled and there was widespread concerns of a prolonged trade conflict. So we may watch for such opportunities this time round as well, but for now, more clarity around US-China ties is much-needed into the coming year, which could still cap risk-taking in the meantime.

Technical analysis: Path of least resistance may be a continued drift lower

Following a 36% rally since mid-September this year, the HSI has since given back more than half of those gains. While the index is now seeking to stabilise at a key 61.8% Fibonacci retracement around the 19,454 level, there are not much conviction for longs just yet, with its daily relative strength index (RSI) dipping back below its mid-line for the first time since September this year, which indicates sellers in control.

The current price action may resemble what occurred in April 2024, where the index experienced a sharp rally, followed by a prolonged downward drift. In this case, we will be keeping an eye on whether the upward trendline in place since the start of the year can hold. Near-term, conviction for longs may have to come from a strong break above the wedge resistance, which may leave any move above the 20,300 level on watch.