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Hang Seng Index enters bull market territory

The Hong Kong Hang Seng Index closed with more than 20% gains from its March depths on Monday as risk sentiment improved along the Chinese market on hopes of recovery and further policy support.

Chinese market led gains for Asia

Asia markets had seen a strong start to the week with the Chinese market inspired gains. A front-page editorial by the Chinese Securities Times, featuring news on the importance of fostering a ‘healthy’ bull market post-pandemic, had seen to Chinese equities soaring. This had included the A50 index leaping to a 12-year high. While China had played the role of being first-in, first-out with the Covid-19 pandemic, a multi-year high nevertheless begets questions.

Looking at valuation multiples, a rising P/E ratio for the A50 index had notably been seen at 13.2. Although nothing of the heights printed more than a decade ago, it is approaching the 2015 and 2017 peaks at around 14.0, fuelling concerns of exuberance in the Chinese market. Similarly, with the Hang Seng Index that had risen 3.8% on Monday, propelling it into bull market territory, one questions whether this is sustainable given the lingering Covid-19 implications and risks of continued US-China kerfuffle.

To a large extent, the enthusiasm across Asia markets on Monday had been reinforced by the positive data trend, seeing the string of PMI surprises out of China in the previous week. While US states had continued to find record Covid-19, China had weathered the Beijing episode relatively well with lessons drawn from the initial wave. Risk sentiment meanwhile had not been significantly dented surrounding the passing of the Hong Kong security law, with the exchanges between US and China providing little material impact to the Hong Kong’s key financial hub status.

Hang Seng Index outlook

On prices, the Hang Seng Index had notably made its way above the 25,307 resistance of the short-term ascending triangle pattern, renewing the bullish momentum. Prices had stalled around the 76.4% Fibonacci retracement level at 26,339 after also having pricing in some of the enthusiasm for large IPOs on the Hong Kong Stock Exchange this week.

With expectations that the PBOC would continue to ease monetary conditions into H2 from RRR to benchmark interest rate cuts after a 25 basis point rate cut to its re-lending and re-discount facilities last week, the HSI does have a couple of supportive underlying factors to count. Barring any sudden renewal of US-China tensions, the momentum remains positive in the short-term for the HSI.

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