The logos of the Swiss banks Credit Suisse and UBS are pictured in Zurich, Switzerland, on June 12, 2023. (PHOTO / AP)

Switzerland-based investment bank UBS expects the Hong Kong Special Administrative Region’s economy will expand 3.6 percent this year following the removal of COVID-19 pandemic measures which boosted the normalization of the city’s economy, and thanks to supportive government policy.

But the economy’s growth rate will slow to 2.5 percent in 2024 as uncertainties in the global and Chinese mainland economy weigh on the prospects for growth in the near-term.

“Hong Kong’s growth is heavily dependent on global growth, trade and financial conditions, and it is also heavily impacted by mainland growth,” UBS Senior Asia and China Economist William Deng said in Thursday’s press conference.

Global growth uncertainties weigh on Hong Kong’s economic growth through the slowdown of global trade, especially high value-added trade; while the mainland’s uncertain economic prospects also drag down Hong Kong’s growth through weakness in mainland corporate-related capital market activities in the city, Deng argued.

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With the prospect of a modest economic recovery, UBS anticipates Hong Kong’s stock market benchmark, the Hang Seng Index (HSI), can hover around 20,600 in 2024, based on the 2025 forward price-earnings ratio of nine times multiple. The investment bank expects earnings of those companies with Hong Kong exposure in the HSI can grow 8 to 10 percent next year.

UBS forecasts Hong Kong residential property price will drop up to 5 percent this year and another 10 percent in 2024 as the positive impact from interest rate

UBS Hong Kong Strategist Angus Chan said investors should adopt a defensive approach for Hong Kong equities in the first half of next year.

“We prefer border reopening beneficiaries such as travel-related companies and Macao gambling stocks, as the pace of recovery has tracked above expectations,” Chan said. “We continue to favor high dividend yield stocks such as infrastructure plays, in light of market volatility and macro uncertainty next year.”

The strategist added the investment bank is still pessimistic about Hong Kong property and bank stocks as these equities are heavily influenced by interest rate movements.

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Looking ahead, the risks of investing in Hong Kong equities include changes in Hong Kong and mainland macroeconomic conditions; changes in the US interest rate environment; and regulatory and political risks, Chan explained.

The Swiss investment bank estimates there have been outflows of $13 billion in equivalent Hong Kong dollars out of the Hong Kong equity market year-to-date.

UBS predicts that the United States will cut interest rates by 0.25 percent as early as March next year. Assuming that the US economy falls into recession in the second and third quarters of next year, the rate cut is expected to gradually expand to 0.5 percent, and the federal funds rate may be halved next year from the current level to 2.75 percent.

UBS forecasts Hong Kong residential property price will drop up to 5 percent this year and another 10 percent in 2024 as the positive impact from interest rate cuts may only become more visible in the latter part of the coming year. Key risks to this sector are weakening of macroeconomic conditions; gradual increase in new housing supply; and the return of interest rate hike cycle.

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UBS Head of China and Hong Kong Property Research John Lam explained: “We estimate that the total inventory of first-hand spot and pre-sale properties will take four years to digest, and in the high interest rate environment, developers with high debt ratios may need to cut prices.”

“The trend of property prices depends on the gap between rental returns and mortgage interest rates. If the US interest rate cut is larger than expected, Hong Kong property prices may rebound. But if property prices fall by another 10 percent, the number of negative equity cases will inevitably increase further that may even exceed historical highs,” UBS Hong Kong real estate analyst Mark Leung noted.

However, Leung said he is not worried that there will be systemic risks in the property market as homebuyers must still pass the stress test; and he also believes that the SAR government still has tools to boost the property market