The Hang Seng index record of underperformance continued this week as concerns about the Chinese economy continued. The index has dropped for four straight days and is now nearing the lowest level in 2023. It has plunged by more than 24% from the highest point this year.

The Hang Seng index has been one of the worst-performing global indices this year. While its American peers like the Dow Jones, Nasdaq 100, and S&P 500 have jumped by double digits, it has crashed by over 24% from the YTD high.

This underperformance is not new. After peaking at $31,167 in February 2021, the index plunged by over 53% to a low of $14,655 in December 2022. This price action happened as the Chinese and Hong Kong economies went through a period of turmoil.

There are two main challenges that investors are dealing with. First, the real estate industry in China is collapsing. Companies like Evergrande and Country Garden that have over $500 billion in combined liabilities are on life support.

The other big risk is the ongoing tensions between the United States and China. These tensions have led to a major distrust among politicians, business leaders, and investors. As a result, the most recent data shows that the total Foreign Direct Investment (FDI) from the US to China has almost dried up.

There are other risks. On Wednesday, economic data from China revealed that the economy moved into deflation in October as the Consumer Price Index (CPI) dropped in October. Deflation is usually a sign that an economy is doing well.

Meanwhile, the Federal Reserve has not ruled out further tightening in the coming months. In a statement on Thursday, Jerome Powell noted that the bank could still hike rates if interest rates remained above 2%. This explains why the Hang Seng index retreated on Friday.

Most companies in the Hang Seng index have crashed hard this year. Country Garden’s stock price has crashed by over 63% this year. Other top underperformers are companies like Li Ning, JD, Zhongsheng Group, Longfor Properties, JD Health, and Xinyi Solar among others. All these shares have plunged by over 50% this year.

On the other hand, there have been some of the top companies in the Hang Seng index. NetEase, a leading gaming company, jumped by over 53% this year. Xiaomi and Lenovo stock prices have surged by over 48% and 40% this year. Other companies like PetroChina, SMIC, CNOOK, and Byd have soared by over 30% this year.

Looking ahead, Hong Kong face numerous challenges in the coming months if the Chinese economy continues struggling. Some of the most notable Hang Seng constituents to watch will be Alibaba, which is being broken up, HSBC, and Baidu. Baidu has also become a leading player in the AI space.

HSI chart by TradingView

The daily chart shows that the HSI index has been in a strong downward trend in the past few months. Along the way, the index has formed a descending channel that is shown in red. It has now moved below the neutral point of this channel.

Along the way, the Hang Seng index has moved below the 50-day and 100-day Exponential Moving Averages (EMA). The Relative Strength Index (RSI) moved below the neutral point. Also, the Average Directional Index (ADX) has crashed to its lowest point since August this year.

Therefore, the outlook for the index is bearish, with the next key support to watch being at H$16,000. This price is about 7.10% from the current level.

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