As the Hang Seng index evaporates, is it safe to buy the dip now?

The Hang Seng index resumed its downward trend this week as demand for Chinese equities evaporated. The index crashed to a low of H$15,500 on Wednesday, down from last week’s high of H$16,255. This is notable since the blue-chip index has crashed by over 32% from its highest point in 2023 and by 50% from its 2021 high.

The Hang Seng index has been slammed in the past few months as concerns about the Chinese economy continued. These concerns reached a fever pitch on Monday when a Hong Kong court ordered Evergrande, a large real estate company to liquidate. As a result, there are elevated risks that other companies like Country Garden, will follow the same route.

The Hang Seng, China A50, and the Shanghai Composite indices continued their sell-off after China published another set of weak manufacturing report. According to the National Bureau of Statistics (NBS), the country’s manufacturing PMI contracted once again in January. It rose to 49.2 in January, remaining below the expansion zone of 50.

These numbers mean that China will likely continue under pressure in the coming months. They also confirm a report by IMF, which noted that China’s economy will expand by 4.6% in 2024 after growing by 5.2% in 2023.

Most importantly, as I wrote on Tuesday, the way Evergrande’s liquidation will work out will have an impact on inflows and outflows from foreigners. Most analysts believe that most foreign creditors will not receive any money during the liquidation process. If this happens, more foreigners will likely dump their Chinese holdings.

A closer look at the Hang Seng shows that most companies in the index have been in the red this year. Sunny Optical, a company that makes optical lenses, has been the worst-performing company in the index this year. It has crashed by 34% YTD and by 13% on Wednesday after delivering a weak forward guidance.

JD Health, a company partly owned by the broader JD Group, has plunged by 33% this year as growth slows. The firm is the biggest online online healthcare platform in China, serving millions of customers. 

The other main laggards in the Hang Seng index are Alibaba Group, Longfor Properties, SMIC, and Li Auto Group. Only a handful of companies have risen this year.

Hang Seng chart by TradingView

In January, I warned investors that buying the Hang Seng dip has proven to be a money-losing activity in the past few years. Everyone who has bought the dip in the past four years has lost money in this period. 

Turning to the weekly chart, we see that the index has crashed below the 50-week and 100-week moving averages. It is also nearing the crucial support level at $14,600, its lowest point in October 2022. Therefore, the outlook for the index is still bearish for now. While a rebound is possible later this year, I suspect that it will continue being highly volatile in the near term. 

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