What does the situation in Hong Kong mean for investors?

Updated: Jul 8, 2020

While general Covid-19 developments have dominated mainstream media and news outlets, the intensifying situation in Hong Kong has gone slightly under the radar.

This story goes all the way back to June 2019, when the protests first started in Hong Kong against government plans to allow extradition to mainland China. (Extradition is the act of making someone return for a trial or prosecution to the state or nation where they have been accused of doing something illegal). Although the Chinese government eventually scrapped those plans, the protests carried on, while gaining traction and momentum. Hundreds of thousands of Hong Kong residents took to the streets to show their anger towards the Chinese Communist Party, and the protests became increasingly violent.

Fast forward to July 2020, and the Communist Party has implemented a new ‘National Security Law,’ which essentially criminalises any form of dissent towards the party. For example, crimes of secession, subversion, and collusion with foreign forces, are now punishable by life imprisonment. As one can probably imagine, Hong Kong residents have not taken lightly to this, and over 300 protestors have already been arrested.

Governments around the world have responded with criticism of the new law. Boris Johnson stated that he is “deeply concerned at the law being passed,” and has promised to further investigate whether the law breaches the declaration with China. The EU Council President, Charles Michel, has said “we deplore the decision.” It is also certainly worth keeping an eye on Donald Trump’s Twitter account over the next few days, as undoubtedly, he will have a controversial or inflammatory statement to make.

Moving on to how this affects the financial markets, the most obvious implications of this new law will be for the Hang Seng (the Hong Kong Stock Exchange), and the Hong Kong Dollar. But I would look further beyond this and think about the consequences for the broader global markets. The attack on Hong Kong’s judicial independence, and the likely political and social instability and fall out from this, mean that there is almost certainly going to be significant a capital flight from Hong Kong. In simple terms, investors will see Hong Kong as a less attractive place to invest their capital, and so will withdraw their money from their HK investments. But this capital won’t just dissipate. It surely has to go somewhere else.

So where might investors look as an alternative location to Hong Kong? It needs to be somewhere with strong Asian connections, heavy ‘soft’ infrastructure and favourable business conditions (low taxes etc). You might have guessed it already - it’s going to be Singapore!

Singapore is already ranked 5th in the world for financial sector competitiveness, according to the Global Financial Centres Index. In other words, it’s already a major financial hub, and has all the right dynamics and conditions that would allow it to further expand. There is already evidence of strong capital flight to Singapore, with foreign currency deposits at Singaporean banks jumping four-fold in April to S$27bn.

There are a few ways that investors can take advantage of this capital flight to Singapore. Some may take a look at the iShares MSCI Singapore ETF (Ticker: EWS). Price charts suggest that this ETF is about 20% down on a year-to-date basis, and so there is still plenty of room for upward movement. This is just one of many investment options available to investors in Singapore.

Source: Trading View

The fundamentals look fairly strong for Singapore. The nation looks likely to benefit from recovering oil prices, the reopening of global trade and the government’s huge stimulus measures (20% of GDP). These positive indicators have encouraged the likes of Morgan Stanley and UBS to both take a bullish view on Singaporean stocks. In particular, Morgan Stanley has picked out cyclical sectors such as banks and real estate, as areas that look to benefit from the economic recovery.

Looking beyond Singapore, there are of course some very significant geo-political themes that are likely to develop. It seems that the rift between China and the likes of the U.S., U.K., and EU, is only going to continue and widen. This certainly wasn’t helped by the way that China handled the virus in the early stages. If developed countries adopt an anti-China stance going forward, it means China will likely look to step up its efforts in emerging markets. This would see the Belt and Road Initiative further expand, as China looks to solidify its position as the rival international superpower to the U.S.

Source: Asia Green

Now more than ever, investors need to pay meticulously close attention to the geopolitical tensions stemming from China. The current conflict in Hong Kong only reinforces this.

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