A top Chinese market analyst said it is still too soon to bet on Hong Kong stocks, as geopolitical tensions and the country’s deflation hold down share prices, but added that low valuations and the likelihood that the economy has hit bottom suggest little room for further decline.

“It’s reasonable to say, Hong Kong stocks have bottomed out, but honestly, I do not have much confidence in how much room there is for upward movement,” said Chen Li, chief economist at Soochow Securities, in an interview with China Daily.

Hong Kong’s stock market has been struggling to deal with liquidity concerns and tepid demands for new offerings in recent years as the country’s economic malaise and external headwinds, including global monetary tightening, continue to take their toll.

After losing more than 40 percent of their capitalization in three years, Hong Kong stocks have valuations well below historical averages and when benchmarked against international counterparts, said Chen, who is also vice-president of Soochow Securities (Hong Kong) Financial Holdings Ltd.

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The benchmark Hang Seng Index, the majority of which comprises mainland firms’ shares, trades at around 10 times forward earnings, versus 27 times for the S&P 500.

More importantly, the market downside risks that stem from economic woes seem to have paused, Chen said. Stepped-up fiscal efforts are expected to be underway in China, given the deadline of meeting its full-year GDP growth goal of around 5 percent, he added.

China’s slower-than-expected growth so far this year has spurred market watchers’ mounting expectations for more fiscal support to help the world’s second-largest economy hit its target amid a myriad of challenges, including a protracted housing downturn and weak consumption.

Fiscal expenditures were up 2 percent in the first half from a year earlier, data from the Ministry of Finance showed. That compared with a 3.4 percent increase in the first five months.

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“The fiscal policy could be seen as conservative in the first half,” Chen said. “To catch up with the plans, government spending will increase in the rest of the year.”

Even in the struggling housing sector — which used to boost the country’s economy but today is a major drag on the market — things could hardly get worse, the financial veteran said.

Chen cited the result of an extreme hypothetical scenario of a housing-market collapse: If urbanization in China were to come to a halt, with no more farmers moving to cities to become urban residents, annual new home sales could be around 670 to 680 million square meters — against an estimate of 760 million square meters under a normal scenario.

In other words, even in a worst-case scenario, the maximum damage in the real estate sector could be just only around 100 million square meters, Chen said. “This extreme assumption indicates that there’s limited room for further decline in new home sales, investment, and construction in the real estate market,” he said.

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A veteran analyst with over two decades of experience as a stock strategist, Chen made the remarks on the sidelines of the brokerage’s biannual flagship investment meeting held in the Asian hub.

Chen has been ranked among the top three experts in both China and Asia multiple times by Institutional Investor, a monthly financial magazine released by London-based publisher Euromoney. After stints at financial giants UBS and Credit Suisse, he joined Soochow Securities in 2018.

But all this doesn’t mean battered Hong Kong stocks could regain solid footing, as lingering geopolitical headwinds and the country’s monetary moves require further watching.

The market is anxiously gauging the impact of a potential escalation of US-China tensions, given the upcoming US presidential election. US Vice-President Kamala Harris will square off against former US president Donald Trump on Nov 5, with the winner taking office on Jan 20.

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Trump waged a massive trade war with China during his term, from 2017-21. A more hard-line trade stance is expected if he wins the White House again. Plans could include a baseline 10 percent tariff on all imports and 60 percent on goods from China.

The situation isn’t expected to be better if Harris were to be elected, as the Biden administration’s current sweeping export curbs aiming at restricting the flows of advanced technology to China are expected to continue.

Meanwhile, Hong Kong market growth also leans on the People’s Bank of China cut on its key lending rate after the almost certain rate cut by the US Federal Reserve in September, Chen said.

China’s central bank has been cautious in its monetary easing as aggressive rate cuts would add pressure on the renminbi and thus spur fund outflows.

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In July, the PBOC unexpectedly lowered two benchmark rates — one-year and five-year loan prime rates — but left them unchanged in the latest move to avoid the market’s overreactions.

However, low inflation and relatively high real interest rates present a strong case for further rate cuts, Chen said.

“It’s very important for the Hong Kong stock market if we could follow suit with the Federal Reserve in cutting rates in September,” he said.