The Hang Seng Index experienced a 25 percent fall in a year of minimal economic growth, high inflation and a stubbornly sluggish stock market following a crash of Chinese stocks on the Mainland in the second quarter of 2015. But it was also a year of extraordinary trading activities of historic volumes, with a daily average of nearly HK$104.6 billion in total turnover value on the Main Board of the Stock Exchange of Hong Kong
By Kenny Lau
It only seemed like yesterday when Hong Kong was caught in a stock market crash. Ever since the financial crisis of 2008 during which stocks listed in Hong Kong collectively lost two-thirds of value within a 12-month period, market volatility has remained vigorous and continual that fewer investors today have the appetite to sit through what others may call an ordinary investment cycle. Risk aversion appears to be the name of the game, and market confidence is, arguably, nowhere near the pre-crisis level.
The stock markets in Hong Kong from late 2011 to early 2015 can be described as a period of high volatility in which stock prices gauged in the Hang Seng Index (HSI) swung more often within shorter timeframes and wider brackets (although in a slightly upward trend overall) than, notably, in any other periods. But they are, by comparison, not major stock market crashes, unlike the turmoil during the financial crises in 1998 and 2008 when the HSI dropped 60 and 65 percent, respectively.
The Hang Seng Index – which includes the largest and most liquid stocks listed on the Main Board of the Stock Exchange of Hong Kong (SEHK) – recorded several drastic market declines in the past 30 years: the Black Monday in 1987 (dropping 52 percent); the fall amid rising interest rates in 1994 (42 percent); the Asian financial crisis in 1997/98 (60 percent); the 9/11 attacks and SARS outbreak in early 2000s (54 percent); the global economic meltdown in 2008 (65 percent); and the tumble in 2011 due to concerns about US and Chinese growth prospects (35 percent).
The most recent market correction in Hong Kong came in the spring of 2015, and it followed a crash of Chinese stocks on the Mainland in the second quarter when they lost a total value of around 40 percent at one point. The result throughout the year was a slide in the HSI from a peak of 28,442 on April 28 to a bottom of 20,556 on September 28 – a 25 percent drop. The HSI was further down at the beginning of 2016, flirting with a new low of just above 18,300 points in mid-February before regaining some territory.
Despite minimal economic growth amid high inflation and a stubbornly sluggish stock market in Hong Kong, behind the stock indices was a year of extraordinary trading activities with historic volumes. The annual total turnover value on the Main Board of SEHK in 2015 was more than HK$25.8 trillion, with a daily average of nearly HK$104.6 billion in any one of the 247 trading days throughout the year – an 80-percent increase over the combined numbers of 2013 and 2014.
The number of trade deals in 2015 reached a yearly record of well over 349 million, meaning more than 1.4 million transactions were completed on a daily basis – an increase by 50 percent and 35 percent compared with 2013 and 2014, respectively. It also means each trade deal in the past year was, on average, larger in terms of turnover value than those in the previous two years. The bad news, however, was the total market capitalization: HK$24.4 trillion at the end of 2015, or a loss of HK$46.7 billion from the previous year.
In comparison with 2014, the number of listed companies on the Main Board increased by 104 to reach a total of 1,644, while the number of listed securities decreased slightly to 8,792. Of the 1,644 listed companies, 728 are incorporated in Cayman Islands, 473 in Bermuda, 206 in Mainland China, and 203 in Hong Kong. Other places of incorporation, although only a handful, include the US, British Virgin Islands, Singapore, Canada, England, Japan, Jersey, Luxembourg, Italy and Brazil.
By the end of 2015, industry sectors by market capitalization according to the Hang Seng Industry Classification System comprised: Financials (29.4 percent), Properties & Construction (14.41 percent), Consumer Goods (11.44 percent), Telecommunications (9.24 percent), Information Technology (8.6 percent), Consumer Services (6.26 percent), Utilities (5.98 percent), Conglomerates (4.71 percent), Industrials (4.67 percent), Energy (3.54 percent), and Materials (1.76 percent).
The 50 leading listed companies by market capitalization on the Main Board as of end 2015 had almost 60 percent of equity market total (among all listed companies); the top 10 as a group had a share of well over 32 percent. These were China Mobile Ltd, Tencent Holdings Ltd, China Construction Bank Corporation (H Shares), HSBC Holdings plc, AIA Group Ltd, Prudential plc, Industrial and Commercial Bank of China (H Shares), CK Hutchinson Holdings Ltd, CITIC Ltd, and CNOOC Ltd.
Hong Kong is a renowned financial center and very comparable in status to those of New York and London. A key characteristic of the Stock Exchange of Hong Kong – which is owned and operated by Hong Kong Exchanges & Clearing (HKEx) – is that of a truly international trading market of stocks and securities. It is the sixth largest global institution of stock exchange by market capitalization, behind the New York Stock Exchange (NYSE), NASDAQ, London Stock Exchange, Japan Exchange Group, and Shanghai Stock Exchange.
According to HKEx’s Cash Market Transaction Survey 2014/15 – which covered trading in the securities market during the 12-month period from October 2014 to September 2015 – local investors and overseas investors as two distinctive groups each had a share of about 39 percent of “contribution to total market turnover value,” with slightly more from the international markets. The remainder (22 percent) came from “exchange participants” (EPs) – registered broker-dealers with a brokerage business for products available on HKEx.
Among all “local” investors, half were at the retail level and the other half as institutional investors, each comprising 19 percent of distribution of market trading. The makeup with overseas investors, however, was drastically different: 31 percent from institutions and 8 percent from individuals. Retail online trading in which “orders are entered directly by retail investors and channeled to the brokers via electronic media such as the Internet” constituted 44 percent of total retail turnover value (and 12 percent of total market turnover value).
The origins of “overseas” investors in the Hong Kong market as indicated in the survey were mostly large economies. The UK was the top place from which 27 percent of total overseas investor trading came, followed by the US with 22 percent. Mainland China had an almost identical market share as the US, trailing very closely behind, while Europe excluding the UK had 8 percent. Together, Asian investors contributed 36 percent to the total trading volume among overseas investors: Mainland China (22 percent) and Singapore (8 percent) were the leading countries in the category.
The derivatives market
In the derivatives market of financial “futures” and “options,” 51 percent of the total contract volume were transacted through exchange participants’ principal trading, including market maker trading and proprietary trading; overseas investors (mainly institutions) contributed 28 percent and local investors 21 percent, according to the Derivatives Market Transaction Survey 2014/15, compiled with trading data in the HKEx derivatives market during the period between July 2014 and June 2015.
Stock options accounted for 55 percent of the total market volume during the period, and the majority (71 percent) of turnover was done through EPs, who also played a large role in the trading of Hang Seng Index (HSI) Options, Mini-HSI Options and H-shares Index (HHI) Options – all well over 50 percent. Overseas institutional investors, on the other hand, were the majority of participants in the futures markets of Hong Kong, with the exception of Mini-HSI futures for which overseas institutional investors and local retail investors were both essential supporters (37 percent each).
In the trading of financial futures and options, retail online trading was even more prominent than in securities, making up 68 percent at the retail level. Moreover, US investors (32 percent) were the largest single group among overseas investors, followed by those of the UK (26 percent) and other European countries (21 percent). Similar to the securities market, Mainland China (10 percent) and Singapore (4 percent) were top countries within Asia from which overseas investor trading had the highest volumes.
HKEx has also recently published the latest statistical profiles of individual investors in the Hong Kong stock market with data from its Retail Investor Survey 2014. The results: 34.5 percent (roughly 2.1 million people) were stockowners; 36.2 percent (2.3 million) as stock investors; 3.6 percent (223,000) as investors of “warrant” or Callable Bull/Bear Contracts (CBBCs); 1.6 percent (100,000) derivatives investors; and 36.4 percent (2.3 million) as stock or derivatives investors, or both.
The average Hong Kong retail stock investor as of end 2014, according to the survey, was a tertiary-educated 47 year-old with a monthly personal income of HK$22,500, who made six transactions (same as 2011) in a 12-month period for an average value of HK$50,000 each. The typical retail derivatives investor, on the other hand, was five years younger with an income of HK$35,000, who also made six transactions (down from 12 in 2011). The median number of warrant/CBBC transactions was also six (down from 10 in 2011), with an average value of HK$13,000 each.
A large majority of investors traded stocks and derivatives through online platforms (73 percent and 84 percent, respectively). Online stock traders had a far higher tendency to trade more frequently than their “non-online” counterparts, each averaging ten transactions as opposed to six in stock investment; likewise, online derivatives traders also had a median of ten transactions, 2.5 times more than non-online derivatives traders.
Among the stock traders, 24 percent conducted trading mainly through broker firms and 75 percent primarily through banks, while the remaining one percent relied on the service of broker firms and banks simultaneously. In contrast, derivatives traders were of the complete opposite, with 72 percent through broker firms and 28 percent through banks.