Hong Kong standoff weighs on short term market sentiment

Tilney Bestinvest’s Managing Director Jason Hollands comments:

In a year that has seen numerous geo-political flashpoints, including the recent threat of a break-up of the United Kingdom, attention has now zoomed-in on the large scale protests taking place in Hong Kong against a recent ruling from Beijing that will determine how the city chooses its leader from 2017.

Although these protests are on a scale not seen in Hong Kong since the 1960s, protest is not uncommon in Hong Kong. These build on a pattern of dissent that has taken place since the handover of sovereignty to China 1997. Recent examples include successful resistance to attempts introduce “patriotic education” into the school curriculum two years ago and vigils in June this year to mark the 1989 Tiananmen Square massacre, which were forbidden on the mainland. The undercurrent of all of these demonstrations is the urge to protect Hong Kong’s special status which is semi-autonomous and where its citizens enjoy considerably higher degree of freedoms than those available elsewhere in China.

These protests however differ from previous ones, not just in sheer scale but in the ambitions and assertiveness of the demonstrators which includes removal of Leung Chun-Ying, Hong Kong’s Chief Executive and threats to occupy administrative buildings.

The protests are student led, but the use of tear gas earlier in the week is believed to have galvanised broader support across the territory, for now at least. How long that remains the case is unclear. Hong Kong is after all a vibrant business centre and with the protests taking place during China’s five day “Golden Week” holiday, this is likely to have some disruptive impact on retails sales from mainland Chinese tourists. An intensification of the demonstrations or a heavy handed response could weigh further on sentiment.

For China's leadership, the challenge to their authority, and how they choose to respond represents a real dilemma. Mainland China sees its own share of protests, often around issues such as corruption rather than fundamental challenge to the Communist system, but to be seen to make serious concessions in response to dissent in Hong Kong could potentially embolden mainland Chinese dissidents, which is why the Chinese authorities are going to draconian lengths to disrupt news of the protests on the mainland.

Yet the Chinese authorities also know that Hong Kong is a critical global financial centre where it engages with the world and is key to its aspirations to promote the Renimbi as a global trading currency. Retaining confidence in Hong Kong is therefore vital.

For now it is unclear how this will play out, but after a strong run year to date the uncertainty has weighed on the Hang Seng Index in recent days. Some investment managers in the region regard the near term pressure on sentiment as a potential buying opportunity for certain stocks. As always, we believe investors should take a long term view to investing in equities, especially in more volatile regions such as Asia.

Our preferred Asia funds, ranked in order of Hong Kong exposure, are:

• Schroder Asian Alpha Plus (27% Hong Kong, 16.2% China)
• Aberdeen Asia Pacific Equity (24.4% Hong Kong, 7.4% China);
• Fidelity South East Asia (14.3% Hong Kong, 31.4% China);
• Newton Asian Income (14% Hong Kong, 4.8% China);
• First State Asia Pacific Leaders (13.6% Hong Long, 6.8% China)

- ENDS –

Important information:

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice.

Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing.

Underlying investments in emerging markets are generally less well regulated than the UK. There is an increased chance of political and economic instability with less reliable custody, dealing and settlement arrangements. The market(s) can be less liquid. If a fund investing in markets is affected by currency exchange rates, the investment could both increase or decrease. These investments therefore carry more risk.

Press contacts:

Jason Hollands
0207 189 9919
07768 661 382
Jason.hollands@tilneybestinvest.co.uk

Roisin Hynes
020 7189 2403
07966 843 699
Roisin.hynes@tilneybestinvest.co.uk

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