Why Are Hong Kong Stocks Still Falling Despite the Fed’s “hawkish” Interest Rate Hike? A Layman’s Explanation of the Logic Behind It
Hello everyone, I’m your financial analyst.
On September 17th, the much-anticipated “major event” for global investors—the Fed’s interest rate hike—finally happened. The result might have been a bit surprising: although the hike was within expectations, Hong Kong stocks didn’t rebound as many people hoped, but instead continued to decline. The Hang Seng Index fell by 0.44%, and the Hang Seng Tech Index also dropped by 0.34%.
Many individual investors might be wondering, “The ‘shoe’ has already landed; why is the market still scared?”
Don’t worry. Today, we’ll break down the core logic of this financial news in simple terms, to understand what’s really happening and what impact it has on our wallets and future investments.
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Why Did the “Hike” Become a Cause for Panic? Because the Fed Is More “Aggressive” Than You Think
First, let’s clarify a concept: “hawkish” refers to a more aggressive or tightening monetary policy, compared to a more moderate, loose approach.
The Fed’s decision to raise interest rates by 25 basis points (from 3.5%-3.75% to 3.75%-4.00%) was anticipated, so it’s called the “shoe landing.” However, what really shocked the market was the tone of Fed Chairman Kevin Warsh’s remarks and the future plans outlined.
1. Aggressive Tone: Warsh emphasized fighting inflation as the top priority during the press conference, using a very firm and aggressive stance. It’s like a doctor prescribing medicine; you thought it would be just a vitamin, but instead, the doctor said, “Your condition is serious, and you’ll need to continue taking the medicine without stopping.”
2. More Hikes Expected: The Fed’s “dot plot” (a chart predicting future interest rate trends) suggests that another hike could occur this year. This means the high-interest-rate environment won’t end soon, and may even last longer.
In simple terms: People thought the hike would be the last, but now it seems there will be more, shattering the confidence of some investors who were betting on a market rebound, leading to the decline in Hong Kong stocks.
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Why Were Hong Kong Stocks the First to Be Affected? Because They’re an “Offshore Market” Highly Sensitive to the Dollar
Some readers might wonder: The Fed is the U.S. central bank; why does it have such a big impact on Hong Kong stocks?
Here’s the key factor: The Hong Kong dollar is pegged to the dollar.
1. Interest Rate Transmission: Since the Hong Kong dollar is linked to the dollar, when U.S. interest rates rise, so do Hong Kong’s. This increases the cost of borrowing locally.
2. Valuation Impact: For high-valued stocks like tech and growth stocks, their value depends heavily on future earnings. When interest rates rise (the discount rate increases), the present value of future earnings decreases. In other words, higher interest rates squeeze out the “fancy” part of these stocks’ value, causing their prices to fall.
3. Capital Outflow: A stronger dollar and higher U.S. bond yields make it more attractive and safer to invest in the U.S. As a result, international funds that were making profits in Hong Kong and other emerging markets start to withdraw. With reduced liquidity, Hong Kong stocks suffer.
In simple terms: It’s like if you’re shopping in one mall (Hong Kong) and another mall (the U.S.) announces a discount and higher interest rates; people will move their money there, causing business to slow down and stock prices to drop.
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Is the Japanese Central Bank Also Going to Raise Rates? “Carry Trade” Closures Strain Liquidity
Another often-overlooked but crucial factor is the Japanese central bank. For years, Japan has had very low interest rates, attracting global funds (including hedge funds) to borrow yen and invest in higher-yielding assets like U.S. stocks and bonds. This is called “carry trading.”
Now, the Japanese central bank is likely to raise rates (with an over 90% chance of doing so). This means:
1. Higher Borrowing Costs: Borrowing in yen becomes more expensive, squeezing the profits from carry trading and potentially leading to losses.
2. Forced Liquidation: To minimize losses or realize profits, these funds must sell their investments (such as Hong Kong and U.S. stocks) and convert them back into yen to repay loans.
In simple terms: It’s like borrowing at low interest rates to invest in stocks, but now the interest rates have risen, and investors have to sell their stocks to pay the higher interest. This puts significant pressure on Hong Kong stock liquidity.
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Oil Prices and Inflation: The Hidden Danger of Geopolitics
Another macroeconomic factor is oil prices. The news mentioned tensions in the Middle East, driving oil prices above $100 per barrel. High oil prices fuel global inflation:
1. Inflation Difficulty to Curb: High oil prices make it hard to control inflation.
2. Fed’s Tightening Policy: To curb inflation, the Fed is reluctant to cut interest rates and may continue to raise them. This creates a vicious cycle: high oil prices → high inflation → high interest rates → pressure on the stock market.
Although economists at Nomura Securities and Goldman Sachs predict that oil prices might fall and inflation might decrease next year if countries use strategic reserves and oil-producing countries increase production, “next year” is too far away for the market to worry about now. The current uncertainty makes investors cautious.
In simple terms: It’s like a sudden doubling of your gas bill; you have to cut down on spending or eat more expensive food, increasing your overall costs. The Fed is like the one controlling the gas bill; as long as oil prices don’t fall, it won’t reduce your expenses (interest rates), and the stock market will remain under pressure.
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What’s the Future Outlook? Can You Still Invest in Tech Stocks? Increasing Divergence, Beware of “Overcapacity”
Finally, let’s discuss what to do next. Can you still invest in tech stocks?
Many industry experts predict significant market divergence:
1. Overall Weakness with Structural Differences:
- Pressure on High-Valued Stocks: High-valued tech and real estate stocks, which are sensitive to interest rates.
- Resilient Stocks: High-dividend stocks (banks, energy, utilities), which provide stable dividends regardless of the economy.
- Opportunity Stocks: Hard-tech companies with solid performance, such as those in computing power and optical modules. If their performance can offset liquidity pressures, they may perform well.
2. The AI Industry’s Challenges: Some warn of “overcapacity,” similar to the 2021 solar and battery industries. If companies in the AI sector raise funds excessively and expand production without matching demand, prices may plummet. Although AI is a promising sector, choose companies with strong barriers to entry and long-term growth potential, not just those relying on hype and reckless expansion.
Advice for Investors:
1. Don’t Rush to Buy at Low Prices: Negative factors need time to digest, especially since the impact of the Japanese central bank’s hike hasn’t fully taken effect.
2. Focus on Stability: In uncertain times, prioritize companies with solid performance, high dividends, or a strong market position.
3. Be Cautious with Story Stocks: Be wary of companies that rely on AI hype without real earnings and large-scale capital expenditures, as they may face overcapacity.
In summary: The Fed’s hawkish stance is just the beginning. The Japanese central bank’s potential rate hikes and high oil prices will continue to affect the market. While Hong Kong stocks may not see a significant turnaround in the short term, there are still structural opportunities. At this time, stability is more important than speed, and performance is more valuable than hype.