(Bloomberg) -- After a year framed by local unrest and the U.S.-China trade war, investors in Hong Kong’s financial markets are more sanguine going into 2020.
The city’s stocks and currency have rallied strongly in December, with the Hang Seng Index among the world’s top national benchmarks. Its 7.5% jump this month has kept it from a second-straight annual decline, which it hasn’t done in 17 years. Meanwhile, the city’s elevated borrowing costs have put the local dollar on pace for its best month since 2003 even as some analysts doubt the strength will stick.
Worries hanging over the city as its economy plunged into recession have ebbed, with protests easing a bit following a landslide for pro-democracy candidates in November elections and the U.S. and China agreeing to an initial trade agreement. They offset earlier worries about trade, which short-circuited robust early 2019 stock gains, and China’s still-slowing economy.
“It’s been a worse-than-expected year for Hong Kong’s financial markets due to the political events,” said Sam Chi Yung, a Hong Kong-based strategist with Springwaters Financial Group Co. “Since the city’s tension has eased recently and more trade deals are expected to be signed next year, the market is set for a good start in 2020,” added Yung, who’s expecting a “good rebound” for the Hang Sang in the first half.
The benchmark may have gotten a jump on that. December’s gain, among the biggest of 2019 for the Hang Seng, has it at five-month highs. Still, its 9.6% advance this year has the Hang Seng trailing most major stock indexes around the world.
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After the Hang Seng’s strong start to 2019, occurring as Chinese equities surged, markets were hit by inflamed trade tensions. Keeping any stock rebound in check has been China’s economy, which grew at the slowest pace since at least the early 1990s in the third quarter. Mainland firms account for more than half the market value of Hang Seng components. Adding to the spring pullback in Hong Kong stocks were persistent protests which started in June.
While there’s anticipation the year-end rally for equities can persist, some market watchers believe the Hong Kong dollar’s 0.5% gain for December will prove short-lived. That as the currency is about to end a year in the strong half of its trading band for the first time since 2016.
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Local interbank lending rates have been elevated since November, triggered by what many consider a transitory surge in demand for cash, such as banks hoarding funds for regulatory checks at the end of the year. The higher rates helped outstrip the income a trader can expect from U.S. dollars, undermining the so-called carry trade. Investors selling the city’s dollars and buying greenbacks has been a profitable move for years.
“The Hong Kong dollar should weaken past the year-end, as local interest rates should soften,” said Stephen Chiu, an Asia foreign-exchange and rates strategist at Bloomberg Intelligence. “A more-sustained retreat in Hong Kong rates and the city’s currency could come after” the Lunar New Year holiday in late January, he added. Then, too, typically sees a seasonal increase for cash.