Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(}function setPanelState(o){dom.root.classList[o?"add":"remove"](,dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

People wearing face masks stand near a bank electronic board showing the Hong Kong share index at Hong Kong Stock Exchange on May 26, 2020.

Vincent Yu/The Associated Press

Hong Kong stocks have become mouth-wateringly cheap as Beijing attempts to tighten its grip on the territory and crack down on dissent. Value hunters with a sense of history may want to take note.

One way or another, the former British colony has found ways to prosper since the middle of the 19th century. It has soldiered through wars, plagues, geopolitical upheavals and shifts in political control, while establishing itself as a major financial centre.

China’s own self-interest suggests it is likely to refrain from permanently stamping out this long-running success story. If so, the outlook for Hong Kong stocks is much rosier than today’s dismal share prices would suggest.

Story continues below advertisement

The iShares MSCI Hong Kong ETF (EWH-NYSE Arca) has tumbled 19.5 per cent since the start of the year. The Hang Seng Index, which tracks large companies on the Hong Kong market, is now trading for less than 10 times its underlying earnings per share.

As Fortune magazine recently noted, this is a valuation typical of a frontier market such as Argentina, Colombia or Sri Lanka, not an advanced economy such as Hong Kong. By way of comparison, U.S. stocks change hands for more than 20 times earnings, while Canadian stocks go for 18 times.

Why are Hong Kong stocks so cheap? For starters, they are not that well diversified – insurance, financial and real estate companies dominate the local listings. These industries are particularly vulnerable if confidence wanes and capital flees the region.

Vicious clashes last year between police and pro-democracy protesters did not help in that regard. The confrontations shattered the city’s peaceful image and demonstrated the brutality of Beijing’s power grab.

Then came the arrival of the coronavirus, which shuttered the economy. At the same time, growing tensions between Beijing and the United States put Hong Kong on the front lines of a new cold war between the world’s two great powers.

The biggest immediate threat is U.S. legislation that takes aim at Hong Kong’s special status under U.S. law. This status dates from an agreement signed in 1992 and allows Washington to treat the region differently than the rest of China in economic matters.

A new bill, passed by Congress last year, requires an annual reassessment of whether Hong Kong still deserves this distinction. U.S. Secretary of State Mike Pompeo said Wednesday that the Trump administration had determined Hong Kong does not, because it is no longer effectively autonomous from mainland China. As a result, Hong Kong is now exposed to a wide range of potential sanctions including tariffs, visa restrictions and restrictions on using U.S. technology.

Story continues below advertisement

So why invest in this mess? Bargain valuations are one reason. The bigger reason, though, is that both the U.S. and China have more motivation than you may think to maintain Hong Kong as a buffer zone between their two economies.

Washington, for instance, may well decide there is little to be gained by rushing to impose the most onerous possible sanctions on Hong Kong. A heavy-handed approach would only provide China with even more reason to quash the pro-democracy movement and fully absorb the territory. Instead, Washington may move slowly to impose sanctions while holding out the renewal of special status as a carrot that it would be willing to offer in exchange for more autonomy for Hong Kong.

For its part, Beijing may conclude it makes sense to stand back and allow Hong Kong a measure of independence. The decision would amount to enlightened self-interest: Chinese companies still need to attract international capital and there are not many places that can make that happen.

About 200 mainland Chinese companies, including giants such as China Mobile Ltd. and PetroChina Ltd., now list their shares on the New York Stock Exchange, according to Citigroup. Many of these companies now have reason to be wary of the regulatory fallout that could result from growing trade tensions between the U.S. and China.

A vibrant Hong Kong stock exchange, operating in a quasi-autonomous Hong Kong, would be a natural alternative roosting spot for these companies. It would allow them to tap pools of foreign capital in a way that satisfies both Western and Asian investors.

“U.S.-China tensions have likely only heightened Hong Kong’s role as an offshore financial centre,” Citigroup economist Johanna Chua argued in a recent report. Investors who aren’t scared off by the current turmoil may want to place a speculative bet on the territory’s future. At today’s prices, you aren’t paying much for the privilege.

Story continues below advertisement

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies