Impact of Political Unrest on Hong Kong Stocks
I have had quite a few people ask me about the situation in Hong Kong and stocks like Mapletree North Asia Trust (of which their main asset, Festival Walk was recently damaged by protestors) and HongKong Land (owns significant amounts of office space in Central).
Before talking about any of these ideas, it is important to appreciate and understand the political situation in Hong Kong. This isn’t a normal cyclical downturn and is something much more.
I have included extracts from our latest letter to our own investors.
No Quick Resolution
The chances for a quick resolution to the Hong Kong situation is slim. Most of us tend to think of conflicts or events having a “one-off resolution” but in this case, the problems are more intractable and complex.
The situation in Hong Kong is likely to resemble the political deadlock in Thailand over the last decade between the yellow shirts and red shirts or worst, the Troubles in Northern Ireland which was a low-level conflict which resulted in numerous casualties.
The current movement has taken a much darker tone especially with the events that transpired at Hong Kong Polytechnic in November which for many crossed the line into wanton violence.
At the same time, it is extremely telling that much of the population still attributed significant amounts of the blame to the police force for using indiscriminate violence and the Government for not responding to the demands of the protestors.
The district election results that just finished is perhaps the best reflection of how people feel. The district elections which are normally a placid affair were intended to elect district councillors that focused on livelihood issues such as transport. Instead, it has morphed into a defacto referendum of the government.
The results are stark – pro-Beijing groups were defeated completely and decisively across almost all districts. The opposition has won almost 90% of the district council seats with voter turnout at an all-time high. While the Pro-Beijing camp had certainly expected steep losses, this was essentially a full-scale rout.
Is the issue high housing prices and inequality?
The issues however are far more deep-rooted than that by this stage. Worryingly, they are issues that the government are unlikely to concede on given the current political climate. While this many change in the future, it is hard to see how an acceptable compromise can be reached between the two sides given how far they are from their ideological positions.
What does this mean for Hong Kong?
There is a strong case for relevancy in Hong Kong given its ability to act as a bridge between China and the world without China having to open up. Evidence of this can be seen in initiatives like the Shenzhen-Hong Kong Connect and the Shanghai-Hong Kong Connect.
Offshore financial hubs require essential ingredients such as the free flow of information, capital and people a robust independent judiciary to exist and thrive. It goes without saying that these things are not the current priority of the administration with regards to Shenzhen and Shanghai.
It is important to note that we are referring here to the raising of offshore capital (non RMB investments) and not onshore capital which they can handle with ease.
At the same time, it has become increasingly clear that Beijing remains reluctant to engage in a heavy-handed response given Hong Kong’s ability to continuing functioning as an offshore financial hub for it to raise foreign capital.
It is important to emphasize political conflict is a norm in many parts of the world outside of Singapore. What of course is not normal is the level of wanton violence on both parties especially seen in the previous weeks.
Ending Thoughts:
It is hard to see how Hong Kong will be a preferred tourist destination in the next 1 to 2 years for Chinese tourists although these sentiments may fade with time as the political situation resolves itself. After all, it was not long ago that the Chinese were boycotting Japan and Korea because of historical conflicts. Today tourism to Japan from China is at an all-time high.
There are other sectors that are far more resilient in light of this. Tellingly, Carrie Lam has already revealed the government’s plan to increase housing supply dramatically in the next few years to resolve the housing situation.
Finally, it is worthwhile to note that while Hong Kong’s position as a pre-eminent offshore hub has certainly taken a hit, it still remains stunningly effective. It remains among the top league tables in terms of funds raised from IPO despite what has happened this year. The secondary listing of Alibaba raised $11 billion capped a bountiful year for them.
There is much talk of Singapore replacing Hong Kong but such talk is hugely mistaken. Singapore serves the ASEAN region while Hong Kong serves China.
These are hugely different geographical regions with different customs, languages and business practices. In Hong Kong, you can wake up and go to sleep thinking about China and China alone and forget that there is a whole world outside of it. That is the size of the market.
In the old legend the wise men boiled down the history of mortal affairs into the single phrase, “This too will pass.”
We believe that these words will likewise apply to Hong Kong in the time to come.
