Cheap and cheaper: stock buy-backs approaching US$10 billion fail to stem losses in Hong Kong market

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Hong Kong-listed companies are splashing cash reserves to buy back their own stocks as valuations declined. Yet, these purchases have failed to stop the broader market from sliding again this year.
The amount of buy-backs reached HK$73.5 billion (US$9.4 billion) this year through September 15, or 70 per cent of the HK$104.9 billion outlays in 2022, according to Hang Seng Indexes Company, the city’s benchmark index compiler. At this pace, annual repurchases could reach HK$92.9 billion in 2023, or 3.9 times the five-year average, it added.

The Hang Seng Composite Index, the broadest gauge which covers 95 per cent of the city’s market capitalisation, has declined 7.6 per cent this year. Last year, the index slumped 18 per cent despite a 175 per cent surge in corporate buy-backs.

“Corporate buy-backs are high precisely due to low market support levels,” said Brock Silvers, chief investment officer at Kaiyuan Capital in Hong Kong. “Companies don’t see growth or investment opportunities as more attractive than their own beaten-down stocks.”

The high level of buy-backs does not seem to indicate an imminent turnaround, Silvers added, as other overriding reasons hurt the market outlook. Hong Kong’s stock market is unlikely to rebound until Beijing addresses its property crisis and solvency among local government financing vehicles, he added.

More companies are betting on the market bottoming out, said Gary Ng, a senior economist at Natixis, a French investment bank. Stock buy-backs serve “as a way to support stock prices and keep shareholders happy, especially for financial institutions,” he added.

Hang Seng Indexes Company said the Composite Index, which has 517 members, would be the broadest gauge for the stock buy-back theme as the spending covered 96 to 97 per cent of the stocks in 2023 and 2022.


However, the Hang Seng Index would make “an excellent choice” for investors seeking a benchmark proxy, it added. About HK$63.6 billion of buy-backs this year covered 87 per cent of the index constituents, the compiler said. The index has declined 9.1 per cent this year.

“The underlying motives for the corporate buy-backs are sector and company-specific, which may be related to their capital structure, finance cost, excess cash level” among others, the compiler said. Buy-backs typically happen when companies deem their shares are undervalued and a meaningful re-rating is overdue, it added.

BlackRock loses confidence in Chinese stocks as property slump stokes losses

Buy-backs have also become more widespread in markets worldwide, according to a recent report published by UK-based fund manager Schroders.

In the US, 45 per cent of large US companies bought back at least 1 per cent of their shares during 2022 and UK companies almost matched this in their own market in 2022, according to the report. Buy-backs were also on the rise among Japanese, French, and German companies, it noted.

“With global interest rates expected to be higher for longer and a continuing weak growth outlook, firms have a lot to consider,” Schroders said. Companies have been using excess cash toward cheaper equity prices and the flexibility of buy-backs is more attractive than [paying] dividends in an uncertain environment, it said.


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