STOCK NOW Hong Kong stocks fall toward 14-month low as China...

Hong Kong stocks fall toward 14-month low as China deflation puts earnings at risk, turns market into value trap

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Hong Kong stocks extended a slump after consumer prices in China fell by the most in three years, heightening concerns deflation will erode corporate earnings and margins. Markets await the Federal Reserve’s rate decision this week at its final meeting of the year.

The Hang Seng Index dropped 2 per cent to 16,000.84 at local noon trading break, the lowest level since early November last year. The Tech Index lost 2.6 per cent while the Shanghai Composite Index slid 0.6 per cent.

Tencent lost 2 per cent to HK$299.40, Alibaba Group declined 3.5 per cent to HK$68 and e-commerce peer JD.com tumbled 7.1 per cent to HK$97.40. Macau casino operator Galaxy Entertainment slipped 2.3 per cent to HK$40.95, while peer Sands China weakened 1 per cent to HK$20.85.

Sportswear maker Li Ning tumbled 13.6 per cent to HK$18.44 after the company bought a 25-storey mixed office and retail building in North Point, Hong Kong, from Henderson Land for HK$2.2 billion (US$282 million) to house its headquarters.

Consumer prices fell 0.5 per cent in November from a year earlier, after a 0.2 per cent drop in October, the statistics bureau said in Beijing on Saturday. That is the steepest since a 0.5 per cent drop in November 2020. Deflation will hurt profit margins and corporate earnings, potentially leading to lay-offs, according to BCA Research.

“Deflation is already pervasive in the Chinese economy,” Arthur Budaghyan, chief China strategist at Montreal-based BCA, said in a note last week. “As long as deflation lingers and common prosperity policies are not abandoned, low equity multiples represent a value trap rather than an attractive buying opportunity.”

02:29

External factors risk for Hong Kong ahead in coming year, finance chief warns

External factors risk for Hong Kong ahead in coming year, finance chief warns

The Hang Seng Index has declined 7 per cent during the past two weeks, bringing the loss this year to 18.4 per cent, the most among major global stock indices, Bloomberg data showed. Moody’s last week lowered China’s rating outlook, as well as outlook for many of the nation’s biggest lenders.

The Fed’s rate-setting committee meets on Wednesday. Policymakers are expected to maintain its key rate in the 5.25 per cent to 5.5 per cent range, according to data compiled by CME Group based on contracts on Fed fund futures.

Most Asian markets were mixed on Monday. Japan’s Nikkei 225 climbed 1.5 per cent and Australia’s S&P/ASX 200 added 0.1 per cent, while Korea’s Kospi index was little changed.

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