SINGAPORE (Jan 8): Backed by a global cyclical recovery and China’s soft landing, positive market sentiment fuelled the Hang Seng Index’s astonishing rally last year. The index surged more than 35% in 2017 to 29,919 points, making it the best-performing market in Asia. Although nearly one-third of the index’s full-year gain came from Tencent Holdings — which is the largest index component, with an 11.8% weightage — the synchronised global recovery and earnings improvement across the board is likely to drive the index’s rally well into 2018.

The HSI has broken out of a key psychological resistance level of 30,000 on the first trading day in 2018, following a period of technical correction in mid-December. We have seen several major upswings over the past 12 months (highlighted in green circles as shown in Chart 2). The uptrend is well supported by its 50-Day Simple Moving Average (SMA) line, and the Fibonacci extension suggests a major resistance around the 30,400 area (127.2% Fibonacci extension). If the HSI follows the duration and trajectory of the previous upswings, we can expect it to extend the rally into higher highs in the weeks to come.

The HSI is trading around 14 times trailing price-to-earnings, a valuation that is not too expensive compared with regional peers but relatively rich compared with its five-year mean. Earnings have shown a strong improvement over the past four quarters, thanks to a strong global cyclical recovery and pickup in domestic demand. Similar trends were also observed in the CSI 300 and Shanghai Composite, which are trading at 16.6x and 16.9x trailing price-to-earnings respectively. This year, the HSI could continue to ride the tailwind of earnings improvement, but the risk factors are still tightening monetary policy and ongoing deleveraging campaign by the Chinese authorities.

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