Hang Seng index is being crashed by Nikkei 225 in 2023

Global indices have been mixed in 2023 with some European indices like the DAX and CAC 40 sitting at their record highs. Asian indices have done well, helped by the strong performance of the Nikkei 225 index, which has soared by over 28% YTD. Topix also sits at the highest level in decades. On the other hand, the Hang Seng index has dropped by about 3% this year.

Why Nikkei 225 is beating Hong Kong stocks

There are three main reasons why the Nikkei 225 is doing better than the Hang Seng in 2023. First, Japanese stocks have received important support from Warren Buffett, one of the most respected investors in the world. He started acquiring stakes in Japan’s five biggest trading houses in 2020. Today, his initial investment has netted over $5 billion in profits. 

As I wrote here, Warren Buffett made a trip to Japan earlier this year where he announced that he was adding his stake in the companies. The impact of this trip is that many foreign investors have flocked to Japan. The most recent data showed that investments in Japanese stocks by foreigners jumped by 610 billion yen in the week to June 3rd. They are now sitting at the highest level on record.

The opposite is happening in Hong Kong, where investors remain cautious because of the growing tensions between the US and China.

Second, the Nikkei 225 index is doing better than the Hang Seng because of the performance of the Chinese market. Earlier this year, the consensus view was that the Chinese economy would do very well this year. The opposite has happened as key sectors of the economy like manufacturing and real estate struggle. This is important because most Hang Seng companies do a lot of business in the mainland.

Bank of Japan decisions

The third reason is that the Bank of Japan has maintained its dovish stance in the past few months. Kazuo Ueda has promised to leave interest rates and quantitative easing policies unchanged. In Hong Kong, however, the central bank has been forced to continue hiking interest rates because of the Hong Kong dollar peg to the US.

Looking ahead, it seems like Japan stocks have the momentum although they are getting overbought. As a result, a brief pullback, as we saw with the CAC 40 and DAX index, cannot be ruled out. This is known as mean reversion since the indices are stuck sharply above the standard moving averages.

The Hang Seng, on the other hand, will likely remain under pressure in the coming months since there is no catalyst. Therefore, there is a likelihood that the Hang Seng index will remain under pressure in the next few months.