Hong Kong Securities Market – Prognosis

Until recent world events, namely Covid-19, which is affecting all the world’s financial markets, securities experts were painting Hong Kong, the premiere financial destination internationally.

According to Security Lending Times, in an article titled The Standout Asian Market, as recently as July 2019,

Bolstered by the significant end-user demand for exposure to China, Hong Kong is a clear destination for investors with its comparatively deep liquidity profile. In the absence of a viable means to transact securities lending via the Stock Connect, we see this trend continuing for the near future.

As it had been an emerging leader in growth next to South Korea, one might wonder if Hong Kong, after seeing such exponential growth for clients lending securities, will be able to sustain its place as a standout in the field, after the present pandemic crisis. The answer is two-part. Yes, and maybe yes. But before arriving at a conclusion, it’s fair to say, even as it was thriving, the Hong Kong market was not without its challenges as 2020 opened the new year.

Despite seeing areas of growth and cause for optimism, in mid-2019, analysts were already predicting challenges for Hong Kong.

Zubair Nizami, vice president, head of Asian securities lending trading, Brown Brothers Harriman, was was quoted in that same Securities Lending Times piece noting that yes, there had been an increase in specials activity across Asia Pacific, but he warned,”… it could be attributed to several factors, such as high asset values, robust borrower demand, increased beneficial owner participation in lending programmes and strong corporate deal flows.” And he continued to say that, “…further escalation in the China/US trade war, continued uncertainty in the Eurozone economy and geopolitical risk factors such as Brexit and escalating tensions in the Middle East may lead to significant challenges for the capital markets.”

It’s worth noting, this excluded the benefit of seeing a Covid-19 on the horizon.

But, if one looks at the history of growth, it is quite possible it’s an indicator of future growth. If that’s the case, the outlook could be better than most, and here’s why. After a huge surge in highly specialized securities trading and a wide array of activity across Asia Pacific (APAC), Hong Kong may have seen some uncertainty, i.e. China and U.S. in trade disagreements and now, Covid-19, but it still may be one of the few to emerge relatively unscathed – at least in the long term.

In an article in USA Today on March 16th, titled, Stocks crater as investors fear the global economy is headed for a virus-fueled recession, what reads as a fear-based treasure trove of a panic piece, full of financial unrest-fueled doom and gloom, there lurks deep within the black and white, a nugget of hope and that might just include Hong Kong.

Said Goldman Sachs analysts regarding the virus outbreak:

The coronavirus has created unprecedented financial and societal disruption. But event-driven bear markets are usually followed by sharp rebounds.

And, given that the entire economy went into free fall, it is notable that Hong Kong rallied strong, even in the midst of loss.

The piece laid out the bloody stats, with Sydney taking the biggest hit and Hong Kong’s Hang Seng hanging in, in the least impacted position:

Overseas, Paris tumbled 5.8%, London sank 4% and Frankfurt gave up 5.3%. Sydney’s benchmark plunged 9.7% and Hong Kong’s Hang Seng lost 4%.

And, it’s also true, that while China thought Coronavirus was contained, on this same day, they saw a surge of the virus, and Hong Kong remained relatively untouched, that is, in pandemic terms. Also, it’s true that all securities firms have contingency plans in place to assure investors all will be well over the long term. Lastly, it does also matter where you start, in terms of how hard the fall. If you were already floundering, one might be able to predict with accuracy, that there may be no way to recover. However, Hong Kong was ranked second as a global leader in APAC at the time of the outbreak, and efforts were announced just today, to double down on the outbreak, in an aggressive move toward complete containment. Furthermore, while the pandemic is causing angst throughout the international lending community, it won’t be forever, nothing is. So, it is wise to look at the trends before the outbreak, to see where the markets might pick up after containment, if of course, all is handled relatively quickly.

So, whether Hong Kong, sees a long-term impact, remains to be determined. Still, the global trends in terms of the overall macro picture, prior to the market crash, indicated that there was growth momentum, especially to attract new clients entering the securities lending space, and for those previous clients who were choosing to re-enter the space.

If we stay in a macro-focused mindset, then the trends should pick up where they left off, even as many Hong Kong investors, take a little time to recover from the jitters, and dust themselves off from the impact.

Also, in a very important footnote, practical naysayer, Nizami, added a prediction that aforementioned Security Lending Times piece, when speaking of Hong Kong:

In the long-term we would expect to see the Hong Kong securities market become more integrated with mainland China. However, the big question…is ‘when will China open its securities lending market for foreign investors?’ While the potential will be a game changer, we believe that we are quite some time away from an established and robust securities lending framework, that can compete with the likes of Hong Kong, Japan or South Korea.