Author|Finet Mao Ting
Recently, Hong Kong stocks have fluctuated sharply, and the unstoppable rally during the "Eleventh" period has accumulated downward momentum.
As you can see in the chart below, the Hang Seng Index (HSI.HK) soared from 17,000 in mid-September to 23,000 on October 7, an increase of 35.85% in less than a month, and then fell from 20,000 to around 20,000 now.
The Hang Seng TECH Index (HSTECH.HK), which covers a number of large-capitalization listed companies, also showed a rollercoaster ride, as shown in the chart below.
In the midst of the sharp fluctuations in the market, the average daily turnover of the Hong Kong stock market has also risen sharply and rarely, as shown in the chart below, the average daily turnover of the Hong Kong stock market since late September has more than doubled compared with the past.
It is worth noting that during the "National Day" holiday, Hong Kong Stock Connect was suspended, so the significant increase in trading volume during this period may come from local and overseas investors, as well as new funds, and this volume has been significantly higher than usual, reflecting that the country has begun to introduce favorable policies after mid-September, which has attracted some overseas funds to return to the market.
After the "Eleventh" holiday, the resumption of Shanghai-Shenzhen-Hong Kong Stock Connect, the trading activity of the A-share market has increased significantly, attracting funds to the north, on the other hand, the recent volatile market conditions have also attracted a lot of southbound funds into the Hong Kong stock market. Hong Kong stocks did not perform well after the "Eleventh Day", but the trading volume was still active.
New investors who open A-share accounts during the holiday period will not be able to open Hong Kong Stock Connect until 20 trading days at the earliest, which means that this part of the incremental funds can only be reinforced by Hong Kong stocks after at least a month.
The Hong Kong stock market has become active, and the most beneficial is undoubtedly the Hong Kong Stock Exchange (00388. HK）。
HKEX's Q3 results are expected to improve
In the first half of 2024, HKEX's revenue performance was not ideal, with half-year revenue only increasing by 2.6% year-on-year to HK$8.062 billion, plus net investment income of HK$2.521 billion and other miscellaneous income, HKEX's total revenue in the first half of the year was HK$10.621 billion, almost the same as last year. Revenue was flat, while operating expenses increased by 7% year-on-year, HKEX's first-half EBITDA decreased by 2.52% year-on-year to HK$7,661 million, and profit attributable to shareholders decreased by 2.96% year-on-year to HK$6,125 million.
It should be noted that in the first half of 2024, the average daily trading volume of equity securities on the Stock Exchange is only about HK$100 billion, and since late September, this average daily trading volume is only equivalent to the one-day trading volume of Hong Kong Stock Connect, and the overall trading volume has more than doubled.
According to Wind's data, it is roughly estimated that since September 20, the average daily turnover of Hong Kong stocks should be at least HK$150 billion, and during the "Eleventh" holiday, the turnover of Hong Kong stocks was above HK$200 billion, and by October 8, the first day after the holiday, the single-day turnover was as high as HK$500 billion, which was significantly higher than the average daily level in the first half of the year.
The sharp fluctuations in the stock market can naturally attract a surge in the trading volume of the derivatives market and ETFs, and it is foreseeable that the trading volume of the derivatives market is expected to rise sharply in the second half of the year.
The higher the trading volume, the higher its revenue from service fees, trading fees, payment fees, custody fees, data service fees, etc. It is worth noting that its operating costs are mainly relatively fixed expenses such as bandwidth and servers, so the more active the market transactions, the higher the revenue, the lower the cost per unit of revenue, and the higher its profits.
It is worth noting that the more active the market, the more derivatives or financing transactions there are, and these transactions involve margin. HKEX usually invests its clients' margin in assets that can be realised immediately, have lower risk and earn general interest, such as bank deposits, Exchange Fund Bills, etc., and since the Hong Kong dollar is a linked exchange rate basis, the interest rate roughly follows the interest rate of the Federal Reserve.
Despite the recent interest rate cut by the Federal Reserve, US dollar interest is still at a high level, so HKEX's client margin can earn higher interest income. In addition, the Hong Kong Stock Exchange will also use its own funds and clearing house funds for the above investments, but the margin is the largest source of its investment funds.
As the trading becomes more active, the base of its investment funds is also larger, and the interest income is also higher, and after returning a certain amount of interest to margin customers, the Hong Kong Stock Exchange can earn the remaining interest, which is free of cost, which can be said to be earned in vain. It is foreseeable that with the increase in trading volume, the investment income of the Hong Kong Stock Exchange will also increase, and these positive factors will be reflected in the second half of the year.
Where are the opportunities at HKEX?
The stock price of the Hong Kong Stock Exchange has moved in line with the performance of the broader market index, the Hang Seng Index, as shown in the chart below.
In other words, after the Hang Seng Index retreated sharply, the share price of the Hong Kong Stock Exchange also fell significantly. During the "Eleventh" period, the stock price of the Hong Kong Stock Exchange climbed sharply from HK$241.60 on September 20 to HK$393.80 on October 7, a half-month rise of more than 63%, and the Hang Seng Index rose by 27% in the same period. After the "National Day" holiday, the share price of the Hong Kong Stock Exchange also retreated from its high, now trading at HK$322.00, down 18% from its high on October 7, while the Hang Seng Index fell 11% over the same period.
It should be noted that although there is a correlation between the performance of the Hong Kong Stock Exchange and the performance of the Hang Seng Index, it is the market volume that is more closely related. Despite the decline in the broader market, as we mentioned earlier, the trading volume of Hong Kong stocks has increased significantly, which means that the performance outlook of the Hong Kong Stock Exchange is actually positive.
Of course, a decline in the broader market index may mean that it is less attractive to funds, which may trigger capital outflows, which may affect future trading performance. Hong Kong stocks have underperformed in the past two years, mainly due to the uncertainty of the economic outlook and the high interest rate of the Federal Reserve.
Hong Kong stocks rose sharply during the National Day holiday, mainly because the outlook for China's multiple stimulus measures on the eve of the holiday brought confidence to the market, while the Federal Reserve has entered a cycle of interest rate cuts, and funds are beginning to seek potential high returns from risk assets.
Hong Kong stocks fell sharply after the "Eleventh" holiday, the main reason is that the expected economic stimulus measures were not launched as soon as expected, but the stimulus measures will definitely land, and the Federal Reserve will definitely cut interest rates, but the time will not be too rushed, which means that the positive factors expected by the market exist, but the implementation time has not been determined, and the sensitivity of the stock market to these good news has also been verified (the market ups and downs before and after the National Day holiday are proof). So, once the expectations are realized, the stock market is expected to make a comeback, as is the Hong Kong Stock Exchange.