The Hang Seng index is in a unique bear market

Remember the investors who saw what nobody else could see in 2007? There may be another moment like that unfolding right now — this time in Hong Kong. The Hang Seng Tech index is dirt cheap today and the companies leading it are doing well in their businesses even as they trade at extremely low levels. That combination makes this bear market unlike any other in recent history.

The index also trades at multiples unheard of in U.S. stock market circles. One would have to go back to the 1980s to find similar valuations anywhere outside Hong Kong.

The Hang Seng Tech index trades today at price-earnings multiple of 16, versus 48x at the peak in 2021 and 10x at the trough in January 2024. According to Michael Burry of Scion Capital — who posts on Substack under the name "Cassandra Unchained" — all the companies in the index remained profitable even at the bottom. The price-earnings ratio has declined 67 percent from its peak, roughly matching the decline in the index itself.

Most readers will remember Burry from the film The Big Short, where he was portrayed as one of the lead characters who correctly bet against subprime mortgages — played by Christian Bale.

The two most severe U.S. market crashes in recent memory came in 2000 and 2007, both seeing declines of more than 50 percent. The 2000 NASDAQ crash lasted about 2.5 years; the 2007 crisis was over in roughly 1.5 years. In both cases earnings fell sharply and price-earnings ratios compressed dramatically — the dotcom bust saw multiples shrink from 150x to 24x, with the tech index dropping 84 percent.

The worst crash of the past 125 years began in 1929, when investors lost more than 80 percent of index value over about three years.

In every major bear market going back to 1900 — outside of China — falling earnings and declining price-earnings ratios hit investors with a double blow. But the Hang Seng Tech crash is different: revenues and earnings continued to grow throughout the bear market. The entire loss in value came from a change in valuation — a measure of investor sentiment alone.

Sentiment toward China remains deeply negative. Key factors include the collapse of the Chinese property market, a subdued consumer in the aftermath of the harsh Covid lockdowns, fears of a Chinese invasion of Taiwan, and foreign investor wariness about the complicated structure of Chinese equity markets.

For brave investors willing to accept the elevated risks of investing in China, this unusual bear market may represent a rare buying opportunity.

 

Hilliard MacBeth

 

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Richardson Wealth Limited is a subsidiary of iA Financial Corporation Inc. and is not affiliated with James Richardson & Sons, Limited. Richardson Wealth is a trade-mark of James Richardson & Sons, Limited and Richardson Wealth Limited is a licensed user of the mark. Richardson Wealth Limited, Member Canadian Investor Protection Fund.