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Hong Kong’s Top Sector in 2018

The Hong Kong stock market fell by almost 14% in 2018, while experiencing considerable volatility. The technology sector was the worst performer of the year, while the utility sector was the top performer. These results may tell us what to look out for in 2019.

The key trend in 2018

The year began with promise following the strong upward momentum that carried over from the end of 2017. The Hang Seng Index (HSI) briefly hit an all-time closing high of 33,154 in January 2018. Yet, the budding Sino-U.S. trade war clouded the rest of the year and brought the HSI to as low as 24,585 in late October. Overall the HSI slid 13.6% in 2018 to 25,845 at year-end.

The possibility of a trade war dominated the news and very likely played a key role in driving the Hong Kong stock market downwards in 2018. The U.S. Fed also hiked interest rates at the fastest pace since 2006, while at the same time downsizing its balance sheet. Under the linked exchange rate system, the tightening environment in the U.S. raised the possibility of draining away funds in Hong Kong – never a good thing for the stock market.

The worst performer in 2018

Still, the trade dispute was the biggest issue. It underpinned the performance of individual sectors in 2018 as well. Because many of the issues in the trade conflict were related to technology (for example the ban of ZTE by the U.S. Commerce Department in April 2018), the technology sector unsurprisingly was the worst performer in 2018, down by 29.6%. Materials and consumer goods sectors did only marginally better and emerged as the second and third worst performing sectors, plummeting by 29.5% and 27.1% respectively. The revenues of these two sectors have a large export component, so the trade war hit them hard.

The utilities sector performed the best and was the only sector with a positive return, albeit a tiny 1.2%, in 2018. As in most market downturns, the utilities sector was where most institutional investors flocked to as a safe haven.

Retail investors may choose to sell their stocks and hold cash during a bear market. Institutional investors, like mutual funds and asset managers, usually don’t have that luxury. They may have a mandate to hold a high percentage of their assets in stocks. That’s why defensive sectors like utilities and telecommunications play a major role in the asset allocation of institutional investors. It allows them to avoid downside risk in a bear market, while still holding stocks.

The top 3 performing sectors in 2018 excluding energy––– utilities, telecommunications, and properties & construction (down by 10.2%)––– all provided services (electricity, transport, and cellular plan) or goods (real estate) locally instead of internationally, which meant they were relatively unaffected by the trade war.

Looking ahead to 2019

The market faces milder headwinds as 2019 unfolds, since the two major factors that plagued the market in 2018 are showing signs of relief. First, the U.S. Fed is projecting a much gentler pace of interest rate increases, expecting to hike interest rates only twice in 2019. Recently the Fed has even signaled that it is considering a slowdown to the downsizing of its balance sheet. Second, the Sino-U.S. trade war might enter a truce in 2019, as China agrees to scale up the imports of U.S. agricultural goods in exchange for a lifting of the tariffs and technology bans.

Given these trends, the worst sectors in 2018 might become the star sectors in 2019 as the factors that clouded their performances are easing. Keep your eyes on technology, materials, and consumer goods.

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