Hong Kong shares ended up on Tuesday helped by a late recovery in oil stocks, although a seasonal trading lull and global debt worries may keep prices rangebound in the near term. Low valuations, particularly for Chinese companies listed in Hong Kong, could offer investors a longer-term buying opportunity ahead of half-yearly corporate results season starting later this month, traders say.
China's Shanghai Composite index fell 0.7 percent, slipping below the 2,800 level, as financials weighed following news of China Merchants Bank's fundraising plans.
The usual summer lull in trading activity was amplified by a political stalemate in the US over raising the debt ceiling and dealing with the ballooning deficit as well as fears over a potential Greek default.
The Hang Seng index rose 0.5 percent with turnover rising from Monday's tepid levels but still 10 percent below the 20-day average. Chart support for the benchmark is at its June low around 21,508. "There's a lot of foot-dragging on these issues in the US and Europe that's making people wonder what to do next," said Christian Kielland, head of Asia trading at BTIG in Hong Kong.
Defensive stocks such as utilities gained in Hong Kong as investors sought safety, with CLP Holdings up 1.5 percent at a three-year high and peer HK & China Gas up 2 percent, trading near its record high.
Long-term investors, in particular pension funds, have been shifting funds to defensive sectors over the past quarter as markets remained volatile, pushing valuations of utilities above historical levels even as the broader market trades at multi-year lows. HK & China Gas trades at 24.3 times forward 12-month earnings, a 27 percent premium to its historical median, according to Thomson Reuters Starmine. CLP Holdings trades at a 26.4 percent premium.
"The stocks that are defensive are not cheap any longer," said Khiem Do, head of the multi-asset group at Barings Asset Management, in a Reuters television interview.
By contrast, the China Enterprises Index of top Hong Kong-listed mainland firms trades at about 8 times forward earnings, the lowest level seen since the aftermath of the Lehman Brothers collapse in 2008. "The Chinese market is cheap because the banks are cheap," said Do, adding that his firm had moved to a "market-weight" position on China compared with "underweight" earlier.
Potential stake sales by large investors, capital raising fears and uncertainties around the extent of bad loans are likely to keep valuations in the banking sector low, at least until half-yearly results next month offer evidence that banks can earn their way out of trouble.
"Everyone is asking when will banks turnaround," said BTIG's Kielland. "I think we're reaching a trough when it comes to China bank valuations. It may still take 6 to 8 weeks for a sustained bounce in the shares and earnings are going to be important," he said.
Chinese banks are expected to report half-yearly results in August and investors will be on the lookout for signs of capital requirements, if any, and more clarity on the exposure to local government debt.