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Beijing’s announcement that it would enact national security law in Hong Kong spooked investors, leading to worries about the consequent impact to local markets. finews.asia spoke to global banks about the outlook for Hong Kong equities.

In the single trading day following the announcement of a draft decision to enact a national security law in Hong Kong, the Hang Seng Index (HSI) shed more than 5 percent.

Many were caught by surprise – including leaders from the business and legal community – due to the preexisting assumption that any new legislation would have to undergo due process through the local legislature, in line with Hong Kong’s constitution also known as the «Basic Law». Also worrying is the potential for retaliation by the U.S. administration that would hit the market.

Although Hong Kong equities stabilized on Monday this week and is undergoing a modest rebound today, questions remain about the future outlook. What say the banks? 

DBS: «Uncertainty Skyrocketed»

«In short, this development is negative as uncertainty has once again skyrocketed,» said Frank Lee, investment strategist of the North Asia chief investment office of DBS’s Hong Kong consumer banking group and wealth management. «Add US-China tensions into the mix, and global investors are likely to be wary about investing in Hong Kong.»

Although short-term volatility will remain elevated, Lee noted that there is «silver lining» in using 2019 market performance during political unrest as a reference to forecast impact. Those that were hit last year, such as Hong Kong banks, Hong Kong property, retail and tourism-related names, are expected to experience similar impact while those that were immune could repeat.

«The risk appetite would remain low, and the period of unrest seen in 2019 would be a reference,» Lee explained. «Fundamentally, the Hong Kong unrest should not impact non-Hong Kong stocks. Stocks that are not Hong Kong unrest-related, and not sensitive to US-China tensions, should be picked up.»

Credit Suisse: HSI-Hong Kong Decoupling

«I have a slightly unusual view on this,» Credit Suisse’s APAC chief investment officer John Woods. «My sense is that there's a decoupling that became apparent last year when the HSI posted positive gains, even though the economy slumped and political instability was quite pronounced.» 

In addition to the potential ability for Hong Kong’s equity markets to withstand downside risks, Woods believes there could be an upside boost due to the potential benefits gained from the de-listing of Chinese ADRs (American depository receipts) that will be re-listed in the city due to unfavorable U.S. legislation. Aside from little or no correlation to the Hong Kong economy, many of these names are tech stocks that could further add growth momentum to the HSI.

«There will be some near-term volatility in the HSI as it finds a new equilibrium but there is no market in Asia can come close to offering the depth and scale of liquidity that Hong Kong provides,» Woods added. «Now I think a lot of these companies will be exploring dual listing opportunities. And to the extent that Chinese companies still need a convertible currency, it seems to me that the HSI still has the unique capacity to outperform.»