Capital markets in Asia and the Pacific region are set to stage a rebound this year, while Hong Kong's global competitiveness and efforts to woo new investors could bring a reversal of fortune for its beleaguered stock market. Zhang Tianyuan reports from Hong Kong.

While the bears have had a field day in a protracted slump in Hong Kong stocks over the past year, dragged down by global uncertainties and apprehension about rising interest rates, financial pundits are not giving in, and remain upbeat about Asia's capital markets for 2024.

The International Monetary Fund sees Asia and the Pacific region outperforming the world economy with a projected growth of 4.2 percent, against a global average growth of 3.1 percent this year.

Heavier capital flow in Asia would do well for Hong Kong despite the city's lackluster performance in the stock market. With the international financial hub ramping up efforts to drive the growth of innovation and technology to diversify its economy and draw fresh capital from nontraditional investor bases like the Middle East, experts are convinced this will reverse the tide.

The special administrative region's flagship benchmark Hang Seng Index has tumbled nearly 20 percent since March 6, 2023, hitting 16,272 points by the close of morning trading on March 5, while the market's trading volume since January 2023 has stood at only about 80 percent of that for 2022. Geopolitical tensions, rising interest rates in the United States and slower economic growth on the Chinese mainland are pinned down as chief factors contributing to the slide in the HSI.

Key long-term overseas players in Hong Kong's stock market, including sovereign wealth and pension funds, have shifted their focus from traditional, vision-based valuation assessments to those influenced by geopolitical factors, said Chen Da, managing director at Fortune Hill Asset Management.

Investors have revised their valuation models, raising the discount rates applied to Hong Kong equities and reducing the ratio of Hong Kong stocks in their investment portfolios, he said.

From a broader perspective, Asian stocks have put up a mixed performance in the past year. Japan's equity benchmark hit a 34-year peak in February, and India overtook Hong Kong in January to claim the fourth spot in the world equity market rankings by market capitalization, according to Bloomberg data.

"India's strong economic performance has attracted substantial foreign investment inflow, propelling its stock market ahead of Hong Kong's to become the third-largest in Asia by market capitalization," said John Chan Kei-yin, executive director of Institutional Division at Tiger Brokers. But China's manufacturing businesses, involving electric vehicles, photovoltaic and other sectors, are still competitive. When the mainland economy is back on track, Hong Kong is poised to restore its status as the continent's third-largest stock market, he predicted.

Confidence among foreign businesses in the SAR's legal environment and economic growth provide a solid foundation for the local stock market to rebound. The 2024 Members Business Sentiment Survey, conducted by the American Chamber of Commerce in Hong Kong and released in January, found that 79 percent of the respondents showed confidence in Hong Kong's rule of law. Besides, 76 percent of those polled saw Hong Kong as a competitive business hub in Asia, given its international connectivity, free flow of capital, low and simple tax system, and legal and regulatory system, while 78 percent said they do not intend to move their regional headquarters away from Hong Kong in the next three years.

Competitive edges

Hong Kong's competitive advantages, including international standards with a transparent regulatory environment and guidelines, a sophisticated and diverse investor base, direct access to the mainland market, and an established listing regime allowing for primary, dual primary and secondary listings, plus strong government policy support, will be maintained, said Andy Maynard, head of equities at China Renaissance Securities (Hong Kong).

According to a report by global consultancy firm PwC, 80 companies are expected to go public in Hong Kong this year, with total funds raised projected to exceed HK$100 billion ($12.8 billion).

In a bid to invigorate the local bourse, the SAR government has come up with a series of measures. In the 2024-25 Budget, Financial Secretary Paul Chan Mo-po said the Securities and Futures Commission and the Hong Kong Stock Exchange plan to shore up the listing regime, improve the transaction mechanism, boost investor services and strengthen market efficiency and liquidity. The HKSE has also consulted the market on various initiatives, such as introducing a Treasury share buy-back regime and maintaining trading operations under severe weather conditions. They are expected to be enforced by the middle of this year.

Hong Kong is also seeking to forge financial ties with the Middle East to diversify partners and open up new capital sources for the local market. A memorandum of understanding has been inked between Hong Kong's Financial Services Development Council and Saudi Arabia's Financial Sector Development Program, focusing on collaboration between the two financial markets.

Fresh capital influx

Chan said the Hong Kong Monetary Authority — the city's de facto central bank — is working with a number of financial institutions on the listing of an ETF (exchange-traded fund) in the Middle East that would track Hong Kong stock indexes. Hong Kong Exchanges and Clearing, which runs the city's bourse, last year included the Saudi Arabian and Indonesian stock exchanges in its list of recognized stock exchanges — a move that will help companies primarily listed on these markets to pursue a secondary listing in the SAR.

"Strengthening ties with the Middle East could help Hong Kong diversify its economic dependence, especially in the face of a slowing Chinese mainland economy, compared to faster-growing regions like ASEAN (the Association of Southeast Asian Nations) and India. Diversification could serve as a strategic hedge for Hong Kong to maintain its status as an international financial hub, differentiating it from mainland financial centers like Shanghai and Shenzhen," said Gary Ng Cheuk-yan, senior economist at Natixis Corporate and Investment Banking.

In the past year, Middle Eastern countries have accounted for about 40 percent of the world's most active sovereign fund investments, with Saudi Arabia's Public Investment Fund leading the pack. "Hong Kong has the potential to develop financial products geared toward Middle Eastern countries, such as Sukuk, or Islamic bonds, to draw investment. Besides, having Arabic-speaking professionals involved in these transactions would demonstrate respect for the cultural norms of the region," said Terence Chong Tai-leung, executive director of Lau Chor Tak Institute of Global Economics and Finance at the Chinese University of Hong Kong.

However, Ng said, collaboration with overseas countries and regions may not bring immediate benefits to Hong Kong's capital market. "There may be opportunities for cooperation, particularly in asset management. Hong Kong should not solely rely on the Middle East market to increase market liquidity, as countries in that region are trying to develop their own financial markets," he said. This is evident with the CSOP Saudi Arabia ETF launch on the HKSE, which aims to channel the city's capital to the Middle East.

In addition to expanding investment channels, experts call for Hong Kong to find new growth engines to boost investor confidence. The Growth Enterprise Market board, which has garnered significant attention for making it easier for high-tech firms to raise funds, could be a fundraising magnet after its latest reform.

Louis Lau Tai-cheong, a partner of capital markets advisory group at KPMG China, said that because of the GEM's recent underwhelming performance, including initial public offerings and trading activity, interest in the platform has waned, and measures should be introduced to make a change. "This requires concerted efforts to attract more quality companies to list on the GEM, and by showcasing success stories, it will revive the interest and confidence of both companies and investors."