APAC Focus: Six themes for Hong Kong

Our year end view for 2022 is that the poor performance of the MSCI HK (down 18% YTD), which measures the performance of large and mid-cap segments of the market, is an opportunity to revisit Hong Kong. We look beyond traditional earnings and multiple metrics and identify six themes for investors across different time horizons. 

as Greater China relaxes COVID-19 restrictions. While well anticipated, valuations of potential reopening beneficiaries remains depressed, underperforming MSCI HK by 28% since end-19. Government policies for the Northern Metropolis, talent acquisition and China-HK Stock Connectcould provide medium to long term structural growth opportunities. However, we expect markets to remain macro-driven.

We remain positive on reopening in 2023E. COVID laggards' market cap is at c43% of pre-COVID levels, underperforming MSCI HK by 28% since end-2019. Although mainland China maintains a zero COVID strategy, we expect measured relaxation to continue with policy to support inbound/outbound tourism such as a shorter quarantine requirement and resumption of outbound group tours. China's vaccine development progress continues with CanSino's inhaled vaccine approved for use in Shanghai in October and a number of mRNA vaccines in Phase 2 & 3 clinical trials. Positive results could support reopening. For Hong Kong longer term, the Northern Metropolis development envisages establishing HK as an international innovation and technology hub and to integrate HK with the Greater Bay Area (GBA). We estimate the development to cost HK$1trn (c35% of HK's 2021 GDP) over 20 years, and to create opportunities for property developers and the wider economy. From 2023E, town planning details, land tenders and timelines of capital projects could be the catalysts.

In 2023, UBS expects global inflation to moderate, lower bond yields and a US$, and US rate cuts from Q3, which should support a re-rating of MSCI HK. In line with APAC and China, the 2023 earnings outlook for HK should be more positive than 2022 due to looser COVID restrictions and the low base effect. However, global recession concerns should dominate markets and lead to a challenging start for 2023.