Why 2015's a year of two halves for Hong Kong

A price return and correction are projected.

The performance of Hong Kong (HK) stocks (represented by the MSCI Hong Kong (MSCI HK) index) is expected to diverge from 1H15 to 2H15.

According to a research note from Standard Chartered, in 1H15, it forecasts an 8% price return, driven by 7% forward EPS growth in 1H and a modest PER re-rating from the current 14.8x, as HK stocks tend to benefit from China’s monetary easing.

In 2H15, meanwhile, Standard Chartered expects the prospects of an interest rate hike by the US Fed to trigger a major correction in HK stocks.

Nonetheless, Standard Chartered believes that markets can recover part of their losses after the correction and end 2015 with flat price returns, excluding an estimated 3% dividend yield.

Here's more from Standard Chartered:

Overwieght China vs. Hong Kong in 1H15: We think many investors have not noticed that MSCI HK has consistently outperformed both MSCI China (mostly HK-listed China stocks) and MSCI AXJ since 2010 until very recently.

The cumulative total return of MSCI HK since 2010 has reached 60% (or 9.9% CAGR), far outstripping the 14% return of MSCI China and 33% for MSCI AXJ during the same period. Figure 5 below shows the relative performance of MSCI HK versus the China and AXJ markets.

An important reason for this outperformance, in our view, is HK companies’ continued overseas business expansion (which is our long-term macro theme for HK).

However, we think the outperformance of HK stocks became excessive in 1H14 and we turned overweight China versus HK in June, as we expect China’s gradual monetary easing to be a catalyst for China equities to perform well.

In 1H15, we maintain our overweight China versus Hong Kong view. In 2H15, if equity markets experience large corrections due to rate hikes by the US Fed Reserve, we believe that HK stocks might, counter-intuitively, be more defensive than China equities.