Omicron, Meituan and Macau gambling crackdown offer new threats to Hong Kong stock optimists

stock, two travellers were tested positive, slumped 2.7 per cent, possible border reopening, underwhelming earnings season, wider than the 7 billion yuan

Like their global peers, Hong Kong’s stock investors are facing a new headwind in Omicron, a new Covid-19 strain that global health officials designated as a “variant of concern.”

Markets sold off globally as the more infectious variant triggered travel bans and lockdown restrictions in Europe and elsewhere, while two travellers were tested positive in Hong Kong last week. The Hang Seng Index slumped 2.7 per cent on Friday, the most in two months. It lost 3.9 per cent for the week, the most since mid-September.

The variant, first detected in southern Africa, has further dimmed the outlook for Asia’s third-largest stock market, adding to concerns about tech earnings and Macau casino crackdown. It has cast doubt on possible border reopening with mainland China next month, a key initiative to revive the city’s broken tourism industry.

“Assuming the worst is probably the safe option for now,” Jeffrey Halley, an analyst at Oanda Corp, an online multi-asset brokerage. “With the delta wave in mind from earlier this year, investors are likely to shoot first and ask questions later until more is known about [Omicron].”

Travel and leisure-related stocks were first to suffer. Casino operators Sands China and Galaxy Entertainment sank more than 6 per cent. Shanghai International Airport, the operator of the Pudong airfield that handles most of the city’s flights, tumbled 4 per cent.

If the delta variant is any guide, investors could write off the market this quarter. The Hang Seng Index has lost 16.6 per cent since the first case hit the city in late June. The Delta Plus variant arrived earlier this month and the Omicron could change expectations for a brighter start to 2022.

Besides the Omicron variant and weak tech earnings, the events in Macau gambling hub have also spooked investors. While the new Covid variant is likely to hurt visits to the casinos, the bigger issue is the ongoing regulatory “clean-up.”

The arrest of Alvin Chau Cheok-wa, chief executive of the city’s biggest junket operator Suncity Group last week has reminded investors about the difficulty in pricing regulatory risk premium.

The Hong Kong market, dominated by Chinese companies, is already reeling from an underwhelming earnings season, especially from bellwethers like Tencent Holdings and Alibaba Group Holding, the owner of this newspaper. Meituan is likely to add to the pessimism.

The food-delivery group swung to a 10 billion yuan (US$1.7 billion) loss last quarter from a profit after the market closed on Friday, wider than the 7 billion yuan consensus estimates partly due to regulatory penalties. The stock has lost more than 9 per cent in two successive weeks, the worst run since early August.

While bearish sentiment still prevails in the Chinese tech sector, some analysts argue a technical rebound could be around the corner as the selling pressure recedes.

“We expect Hong Kong stocks to recover in the following month from the pullback spurred by the recent earnings forecast cuts,” said Cliff Zhao, a strategist at CCB International. “We suggest investors do rangebound trading before the year-end and get prepared for a rebound in the first quarter.”

A resurgence in Covid-19 is one of the four market-level concerns for Morgan Stanley, in addition to earnings headwinds, power shortages in winter, surging producer prices and further slowdown from the property market and retail consumption.

That was on November 14, when strategists at the US investment bank cautioned against upgrading Chinese stocks to overweight, before Omicron entered the pandemic lexicon.

The new Covid-19 strain is spreading in Europe as the first cases of the highly infectious variant were confirmed on Saturday in the UK, Germany and Italy, prompting many European countries and elsewhere to tighten border controls.

As Omicron cases spread, restrictions could still be tightened in places with zero-Covid policy like Hong Kong. Calls for Covid-19 end-game, or a turnaround in stock losses, could be premature.

Like the virus, this might be something that never really goes away completely and investors will have to live with it and manage around it, said Peter Rutter, head of equities at Royal London Asset Management. Just as supply chains looked like they were healing, this could cause some setbacks, he said.

“It’s not the virus itself that market fear, but policy reactions to the virus,” he added. “If there are new restrictions or enhanced restrictions on activity, then we could see some spillover into the next week and month. Some countries, like the US and UK, might not react to it as much as countries like China with their zero-Covid strategy.”

Additional reporting by Reuters.

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