Hong Kong shares fell on Wednesday as investors cut risk while hedge funds took the opportunity to build bearish positions on large caps, betting that turmoil in the Middle East would weaken markets. Overall turnover on the Hong Kong stock exchange was its lowest this week, however, suggesting investors were not rushing for the exits as relatively resilient mainland markets underpinned investor confidence.
The benchmark Hang Seng ended the day down 1.5 percent, snapping a three-day upward streak. The China Enterprises Index of top Hong Kong-listed mainland companies fell only 0.8 percent helped by a mild 0.2 percent drop on the Shanghai Composite. "Investors are taking into account oil prices, unstable situations in the Middle East and Africa, and yesterday's lower manufacturing activity reading. Profit-taking was definitely a contributing factor to this morning's decline," said Zhang Qi, an analyst at Haitong Securities in Shanghai.
Some investors have become more optimistic about the outlook for Chinese shares, after last year's underperformance and subsiding inflation fears offer opportunities to pick up bargains. According to Thomson Reuters data, the H-share index in Hong Kong was trading at a multiple of about 9.4 times its forecast 12-month forward earnings, its lowest in two years.
A trader at a large European investment bank said hedge fund activity stood out as "shorts clutter the top of the pad", referring to trading desks' order books, but there was no sign of long-only funds panicking. Still, investors are likely to wait for a pullback in US stocks, the top performers this year, to play out before putting funds aggressively into local markets.
Property developers were weaker across the board with the sector sub-index in Shanghai down 1.1 percent while the Hang Seng property index fell 2.2 percent. Hong Kong developers gave up Tuesday's gains after the Hong Kong Monetary Authority warned of an earlier-than-expected cycle of interest rate increases.
Shares of HSBC extended their recent run of weakness and were the top drag on the benchmark, down 2.2 percent. Short-selling in stock was 26 percent of the total short turnover in Hong Kong by the midday trading break. Bucking the broader trend in an early bullish sign for the market, the heavyweighted Chinese financial sector was broadly higher with the sector sub-index in Shanghai up 0.5 percent on growing optimism over bank earnings.
"People are saying the January earnings outlook for China Merchants Bank in particular is pretty good," said Sun Peng, an analyst at Bank of China international in Beijing. Shares of China Merchants Bank, China's fifth largest lender by market capitalisation, rose 1.2 percent. Its Shanghai-listed shares rose 2.8 percent on highest trading volume since October last year.
Casino operators were broadly lower, despite a record month for gambling revenue in Macau, after Sands China Ltd's US parent Las Vegas Sands Ltd was hit by corruption allegations. Sands China shares fell 6.2 percent while rival SJM Holdings fell 1.9 percent.
Macau-related casino shares have risen strongly over the past year as tourists have flocked to the world's largest gambling market. Over that period, SJM shares have risen 190 percent while Wynn shares have more than doubled. Sands China shares have seen a relatively modest 65 percent advance, those gains easily outpacing a rise of around 10 percent for the Hang Seng index.