- The Hang Seng Index traded as low as 0.92 times its net asset value in March, as stock prices dropped below the book values of the 50 constituents
- When the index’s price-to-book ratio fell below 1 in 1998 and 2016, it rose at least 36 per cent in the following year
Hong Kong's stocks are so beaten down that the Hang Seng Index is now trading below its net asset value for only the third time in almost 30 years.
The 50-member benchmark was valued as low as 0.92 times the book value in March, meaning the stock prices were below the stated values of the constituent companies. It was the third time the metric has dropped below 1, according to Bloomberg data that began to track the valuations in 1993. The Hang Seng last traded at 0.99 times the net asset value.
That is probably an auspicious omen for stocks, if history is any guide. When the Hang Seng's price-to-book ratio was below 1 in 1998 and 2016, the equity gauge jumped at least 36 per cent in the following year.
The Hang Seng Index, which was developed by the bank of the same name in 1964, is the world's only major equity benchmark that has dipped below the net asset value, as the coronavirus epidemic has swept through global financial assets. The multiple for the Standard &Poor's 500 index is 2.89 times and that for the Shanghai Composite Index is 1.36 times.
The battered valuation prompted GF Securities to make a bullish call on the city's stocks for the second quarter and Guosheng Securities to describe it as a "golden" buying opportunity.
"Low valuations don't constitute a reason for buying, but extreme low ones may do," said Liao Ling, an analyst at GF Securities in Shanghai. "The extremely low valuations have already implied pessimism about an overseas crisis scenario and worsening fundamentals. There's no need to be overly pessimistic and we recommend adding Hong Kong stocks in the second quarter."
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Of the 50 companies on the Hang Seng Index, 26 are trading below book value. Shares of Swire Pacific, a conglomerate that runs businesses from property and food to airlines, had the biggest discount to stated value, with a price-to-book value of 0.27 times, according to Bloomberg data.
The Hang Seng Index surged 69 per cent in 1999 after trading at a discount of as much as 7 per cent to its book value a year earlier. It rallied 36 per cent in 2017 after the discrepancy was around 3 per cent the year before.
The gauge entered bear market territory for a second time in two years on March 13 after a 20 per cent decline form a high in April. Dip buyers are already on the move. Mainland traders have poured HK$228 billion (US$29.4 billion) into Hong Kong stocks in the first three months of the years, compared with net buying of HK$249 billion for the whole of 2019, Bloomberg data showed.
"The worst of the overseas sell-off may already be behind us and the impact of the overseas tumult on Hong Kong stocks will be abating," with global policymakers and central banks moving to cushion the economic damage caused by the ailment, said Zhang Qiyao, an analyst at Guosheng Securities.
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