On November 29, after 31 years, another “golden cross” occurred between Taiwan and Hong Kong stocks. The quantitative and qualitative changes in both markets have attracted significant attention. In this regard, Liu Zongsheng, chairman of the Securities Investment Trust & Consulting Association, said in an interview that Taiwanese investors’ enthusiasm for domestic stocks has enabled the Taiwanese market to regain its “home field advantage.”

Foreign investors join in, adding momentum

Liu said that “Taiwan and Hong Kong stocks have both experienced qualitative and quantitative changes.” Although Hong Kong is an international financial center, the giant initial public offerings (IPOs) it needs every year have been lacking recently. Price-to-earnings ratios have gradually weakened over the past several years, and problems have occurred in secondary market liquidity. Hong Kong only has 7-8 million ordinary stock investors, so the liquidity and secondary market development have lagged other markets, causing hard times in the primary market.

Liu said that although Taiwan has not seen large IPOs recently either, its secondary market is much more robust than Hong Kong’s. He described the support of Taiwan stocks from both domestic and foreign capital, giving Taiwan much more of a secondary market than Hong Kong.

Taiwanese stocks have regained their “home field advantage” for domestic investors. For example, Taiwan has 8 million domestic ETF investors, 6 million of whom buy Taiwan equity ETFs. Looking at active funds, at its lowest point, Taiwan had only NT$150 billion, but it now has NT$500 billion. Taiwan stocks now make up the core of Taiwanese portfolios. Meanwhile, the market value of Taiwanese stocks has approached NT$ 60 trillion, over 40% of which is held by foreigners.

Moreover, foreign investors see IC semiconductors as the “core group of sacred mountains protecting the country.” Everything about these companies is highly valued, from their global deployment to design processes; they are indispensable for core semiconductor manufacturers and supply chains around the world.

The original core of the Hong Kong stock market was financial services. Over the past few years, however, due to political factors and international changes, Hong Kong’s service orientation has diverged significantly from Taiwan’s industrial-based competitiveness and global moats. These changes in stock market positioning are the result of a natural progression in performance quality, industry competitiveness, and quantitative performance, including acceptance by investors and overall market attention.

With capital market internationalization, foreign investors see Taiwan differently

Tien-mu Huang, Chairman of the Financial Supervisory Commission (FSC), said during an inquiry by the Legislative Yuan Finance Committee that since the capital market is very international, foreign investors pay attention to factors including the openness of the market, the profit performance of listed companies, corporate governance, and sustainable development. He further noted that Taiwan’s stock market has made great progress in the past eight years, and the industry structure has changed. Thirty years ago, Taiwan was dominated by traditional industries and finance; now, its niche is semiconductors. Despite the storms, Taiwan stocks have become more resilient overall.

The Securities and Futures Bureau of the FSC said that four major factors have prompted the “golden cross.” As of the end of October, the price-to-earnings ratio was 17.53, and the cash yield rate reached 3.79% (3.89% with stock dividends). The cumulative revenue of domestically-listed OTC companies was approximately NT$32 trillion as of the end of October. Although their revenue decreased by 9.86% from the same period in 2022, it was still the third-highest performance. Their single-month revenue in October was NT$4 trillion, an increase of 2.29% from the previous month, and the highest single-month revenue this year. In the first three quarters of last year, the cumulative pre-tax net profit of domestically-listed companies (excluding financial holding companies) was NT$ 2.5 trillion, down 34.39% from the same period the previous year, but still the third highest over past years.

All these factors make Taiwan stocks a potential target when the US stops raising interest rates and foreign investment becomes active again. Kao Ching-ping, deputy director of the Securities and Futures Bureau, said that the net inflow of foreign capital in November was US$11.257 billion (NT$351.9 billion). The previous November was even higher, reaching US$20.785 billion, second only to November 2003, with US$22.413 billion.

More IPOs in Indonesia and India than Hong Kong

Hong Kong has also seen a significant decrease in large IPOs. Other observers have also attributed the lack of growth in the Hong Kong stock market to this factor. An unnamed senior executive of a large financial holding company said that the Southeast Asian IPO market has undergone a major shift. Hong Kong was replaced by Indonesia in the first half of this year, but Indonesia itself was not overly hot. Rather, “other markets are cold, especially Hong Kong.”

Hong Kong has topped the list of global IPO fundraising destinations seven times in the past 14 years. However, according to Dealogic statistics, Indonesia has now surpassed Hong Kong to rank fourth in the world, behind China, the US, and the UAE. In addition, Indonesian IPOs in Q1 were worth US$1.45 billion, setting a Q1 record, twice that of Hong Kong in the same period, while also surpassing Tokyo and London. Hong Kong’s decline is even more significant with the rise of emerging IPO markets in Southeast Asia.

In fact, it is not only Taiwan who has now achieved a “golden cross” with Hong Kong. The Indian stock market has also overtaken Hong Kong by market cap, becoming the seventh largest in the world. According to data from the World Federation of Exchanges (WFE), as of the end of November, due to increased liquidity and domestic participation, the National Stock Exchange of India (NSE) reached US$3.989 trillion, surpassing the Hong Kong Stock Exchange at US$3.984 trillion. In terms of market index or capitalization, Hong Kong stocks has overtaken by the Taiwan and Indian stock markets, highlighting structural problems in need of urgent improvement. The root cause is however still political. The implementation of “common prosperity” in China over the past two years has caused foreign investors to withdraw not only from China, but also Hong Kong.

Impact of the protests

An anonymous financial executive said that when the Extradition Law was passed and the Hong Kong government suppressed Hong Kong’s freedom of speech under orders from Beijing, it was like “Hong Kong was crippled by China itself.” Hong Kong has been equated globally with China, especially as the trade war continues to heat up. The more technologies the US sanctions, the greater the blow to Hong Kong.

There are also other endogenous problems. The executive said that more than 600 companies are in line for IPO hearings on the Hong Kong Stock Exchange. The number of IPOs is likely to be lower in 2023 than in 2022, the fifth consecutive yearly decline. Even if an IPO goes smoothly, however, China’s economic problems will still affect investors’ confidence.

In addition, the real estate market is sluggish. In the past, outside of finance, the hottest stocks in Hong Kong were in real estate, showing a lack of substantial industrial support. Now, real estate stocks themselves have collapsed by half. Another unnamed financial executive said that the 2019 protests were the starting point of the real estate collapse. Between 2019 and 2023, office rents in Hong Kong plummeted by 35%, and prices fell by about 32%. The current office vacancy rate in Hong Kong is about 14.73%, more than three times that in 2019.

A senior investment banking executive who has closely observed the situation in Hong Kong also said that the crisis of Hong Kong's real estate “has reached such a depth that even the investment bank Goldman Sachs has been trapped.” The executive noted that when Goldman Sachs sold the entire 88WL commercial office building in the Central District at the beginning of this year, it first offered HK$1.35 billion, but with no offers, it cut the price by about one-third to HK$900 million.

The executive also said that Hong Kong’s vacant Grade A office space reached a record high of 13 million square feet in 2023. In addition, UBS estimates that Hong Kong’s residential housing prices fell by 15-20% in 2023 from the peak, and will decline by an additional 10% or more in 2024. Furthermore, the value of mortgage loans in Hong Kong is relatively high (about 80-90% of the transaction price). When the decline exceeds 20%, real estate can go “underwater.” The number of underwater residential loans in 2023 3Q reached 11,123, a 2.3-fold increase from Q2, and the amount of negative equity reached HK$59.3 billion, an increase of 2.4 times from the previous quarter. This is not only a real estate crisis, but will further expand into systemic risk for the financial industry. Finance and real estate have always been the core of the Hong Kong stock market.