Behind Hong Kong's Stock-Market Surge: An Old Bank and a Millennial Tech Giant

By Steven Russolillo Features Dow Jones Newswires

One is a British bank founded in the 19th century colonial era. The other is a millennial Chinese technology giant barely two decades old. Together, they are driving Hong Kong's stock market to its highest level in two years.

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A 20% rise in the shares of HSBC Holdings PLC this year and a 50% jump in Tencent Holdings Ltd.--the two biggest stocks by weighting in the benchmark Hang Seng Index--have helped push it through the 26000 barrier this week for the first time since July 2015. The index's 1% rise on Thursday added to a surge in global equities after U.S. Federal Reserve Chairwoman Janet Yellen overnight said the central bank is ready to adjust policy if the recent slowdown in inflation persists.

Other Asian markets benefited as well. South Korea's Kospi index jumped more than 1% Thursday after the Bank of Korea kept interest rates unchanged and raised its growth forecast. The Kospi has surged 19% this year to all-time highs despite the accelerating nuclear threat from North Korea.

And overall, the MSCI AC Asia ex-Japan index has risen steadily, up 23% this year. The index's worst pullback this year has been just 2%, the smallest intra-year decline in at least 30 years and far below the average pullback of 20% in a given year, according to J.P. Morgan Asset Management.

"I've been asking this same question since March about when we're going to get consolidation or a market correction [in Asia]," said Tai Hui, chief market strategist Asia at J.P. Morgan Asset Management in Hong Kong. "Just because we're overdue doesn't mean it has to happen."

The irony, in Hong Kong at least, is the market's two main driving forces couldn't be more different. Tencent and HSBC have helped the index surge about 4% this week, on pace for its best weekly performance in a year.

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Roughly half of the rise in banking giant HSBC's shares this year have come since the end of June. Major global banks with operations in the U.S. have performed strongly since then, after the Fed's annual stress tests gave most a clean bill of health, paving the way for more buybacks and dividends.

While the Fed doesn't have a say over HSBC's dividend policy, analysts say the bank might follow its U.S. peers by stepping up its shareholder-friendly payouts this year, on top of an already attractive 5.3% dividend yield. An expected rise in borrowing costs world-wide has also helped global banks including HSBC, as it should improve their profit margins.

HSBC was already one of the Hang Seng's biggest companies 20 years ago when China regained control of Hong Kong. Despite its British heritage, it is the only company that remains among the Hang Seng's top 10 largest stocks by market cap in the same form as it was in back then.

HSBC is today the largest company among Hong Kong-listed financials, which as an industry makes up 47% of the Hang Seng Index.

Meanwhile Tencent, which was founded in 1998, is now the world's largest videogame publisher by revenue. It also owns China's largest social network, WeChat, where people use it for everything from communicating with friends and family to ordering and paying for meals to booking vacations.

In nearly two decades, Tencent has already catapulted to become one of China's most valuable companies by market capitalization, flip-flopping with fellow tech giant, New York Stock Exchange-listed Alibaba Group Holding Ltd., for the top spot.

And Tencent's rally this year has made it the Hang Seng's biggest constituent, with about a 12% index weighting.

Tencent has ridden the global surge in tech stocks this year, which has helped the likes of Apple Inc. and Facebook Inc. also record strong gains. Its shares suffered a rare blip last week, when the company imposed a curfew and daily playing-time limits on children who play its top-grossing mobile game, Honor of Kings.

Analysts worry the new policies, which were implemented as a way to prevent gaming addiction, could hurt Tencent's overall revenue, of which 30% comes from mobile gaming. But the stock this week nearly recovered those losses, a sign that momentum is still in its favor.

Write to Steven Russolillo at steven.russolillo@wsj.com

(END) Dow Jones Newswires

July 13, 2017 04:04 ET (08:04 GMT)