Hong Kong’s Hang Seng index (HSI) is struggling to partake in the global equity rally on Thursday, considering the myriad of uncertainties that are now engulfing the city.

Hong Kong has now taken centre-stage in a long-running conflict between the US and China. The recent announcement that the US State Department no longer viewed Hong Kong as autonomous is threatening to widen the rift  between the world’s two largest economies. Such extraneous pressures come at a time when the domestic economy is reeling from local protests as well as the Covid-19 outbreak.

Mainland investors rush in

Given the HSI’s year-to-date decline of 17 percent, Hong Kong stocks have proven tempting for mainland China buyers, who have been net buyers in every session bar six so far in 2020. With over US$35 billion flowing across the border, China-based investors now own nearly three percent of the total market value of Hong Kong stocks that are eligible for cross-border trading. Additionally, the constituents of the Hang Seng index could see new entrants in August, with Alibaba’s expected inclusion into the benchmark index potentially attracting some US$650 million of passive fund inflows for the stock.

How to Break the Bear?

Still, such supportive inflows may not be enough to break the downward trend that it’s been so clearly entrenched in over the past couple of years. The HSI is firmly in a bear-market, as it now stands 29.4 percent lower from its record high in January 2018. Despite recovering some seven percent since 23 March 2020, when it registered its lowest point since 2016, the Hang Seng index has still lags behind the MSCI Asia Pacific Index’s 23 percent gain during the same period (March 23 – May 27, 2020).

With Hong Kong at the epicentre of escalating US-China tensions, the chances of the HSI having enough lift to break out of this multi-year downward trend appears slim, at least over the near-term. Until investor sentiment can be restored with the dispelling of such uncertainties, the Hang Seng index is expected to have a tough time seeing a meaningful recovery.

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