(Bloomberg) -- After a year framed by local unrest and the U.S.-China trade war, investors in Hong Kong’s financial markets are more sanguine going into 2020.
The city’s Hang Seng Index has rallied 7.1% in December, among the world’s top major benchmarks. Elevated local borrowing costs have put the Hong Kong dollar on pace for its best month since 2003 even as some analysts doubt the strength will stick.
Worries are still hanging over the city after its economy plunged into recession, and as protests continue following a landslide for pro-democracy candidates in November. But for Hong Kong markets, helping sentiment this month was an initial trade agreement between Washington and Beijing which helped power a return to risk assets globally and sent the S&P 500 to new all-time highs in the U.S.
The Hang Seng Index lost 0.4% on Tuesday on volume that was 21% lower than the 30-day average.
“It’s been a worse-than-expected year for Hong Kong’s financial markets due to the political events,” said Sam Chi Yung, a Hong Kong-based strategist with Springwaters Financial Group Co. “Since the city’s tension has eased recently and more trade deals are expected to be signed next year, the market is set for a good start in 2020. Yung is expecting a “good rebound” for the Hang Seng in the first half.
Despite the December rally, the Hong Kong benchmark is still trailing most major stock indexes around the world this year. After the Hang Seng’s strong start to 2019, occurring as mainland equities surged, markets were hit by inflamed trade tensions, an extended drop in the yuan and worsening economic data in China. Chinese firms account for more than half the market value of Hang Seng components.
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While there’s anticipation the year-end rally for equities can persist, some market watchers believe the Hong Kong dollar’s 0.5% gain for December will prove short-lived. That as the currency is about to end a year in the strong half of its trading band for the first time since 2016.
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Local interbank lending rates have been elevated since November, triggered by what many consider a transitory surge in demand for cash, such as banks hoarding funds for regulatory checks at the end of the year. The higher rates helped outstrip the income a trader can expect from U.S. dollars, undermining the so-called carry trade. Investors selling the city’s dollars and buying greenbacks has been a profitable move for years.
“The Hong Kong dollar should weaken past the year-end, as local interest rates should soften,” said Stephen Chiu, an Asia foreign-exchange and rates strategist at Bloomberg Intelligence. “A more sustained retreat in Hong Kong rates and the city’s currency could come after” the Lunar New Year holiday in late January, he added. Then, too, typically sees a seasonal increase for cash.
(Updates with details throughout. Earlier versions of this story were corrected for wrongly spelling Hang Seng in fourth paragraph, and to remove an incorrect reference to annual gains in second paragraph.)