SME sentiment in Standard Chartered index plunges to record low in 1Q16

External sector faces stronger headwinds.

It has been noted that sentiment among SMEs in Hong Kong has deteriorated to a record low in Q1-2016.

According to a release from Standard Chartered, the Standard Chartered Hong Kong SME Leading Business Index (SME Index), released jointly by Standard Chartered Bank and the Hong Kong Productivity Council, fell to 42.8 in Q1-2016 from 44.4 in Q4-2015 (50 being neutral).

The main sub-indices more indicative of near-term business performance (‘sales’ and ‘profit margin’) fell the most, by 7% and 11% q/q, respectively, dipping further into negative territory.

This, together with the very weak reading of 26.2 for ‘global economic outlook’, suggests that external headwinds – led by Renminbi depreciation worries further weighing on China’s already-weak growth outlook – pose a clear and present challenge to SMEs.

Here's more from Standard Chartered:

In contrast, the ‘hiring’ and ‘investment’ sub-components appear much more resilient, reflecting a more neutral view towards the longer-term outlook.
The fact that only 2% of our respondents said they would cut wages also indicates little slack in the labour market for now, and that SMEs in general are in no rush to cut back spending and scale back operations.

Of the three biggest industrial groups, ‘retail’ overtook ‘manufacturing’ and import/export/wholesale’ after having led the fall in three of four quarters in 2015. This suggests that the main drag on Hong Kong’s economy could be shifting gradually from domestic to external.

The improvement in retail sentiment appears broad-based, although seasonality could also be a factor, as business typically picks up around the Lunar New Year. Also comforting is that, on average, only one-third of respondents said they would be affected by higher interest rates.

This is in line with our view that the impact of higher Hong Kong dollar (HKD) interest rates will be more psychological (e.g., on the real estate sector) than tangible.