UBS released a research report stating that the upcoming Federal Reserve rate cuts will be positive for Hong Kong property stocks but negative for Hong Kong banks. Regarding MSCI Hong Kong constituent stock allocation recommendations, ahead of the new rate cut cycle, the firm continues to favor property developers while becoming increasingly cautious on banks. It currently maintains an underweight position on bank stocks and has placed Hang Seng Bank (00011) on its least preferred list. On the other hand, the firm has added Wynn Macau (01128) and Galaxy Entertainment (00027) to its most recommended list, as they benefit from improving high-end customer demand growth and attractive dividend yields.
As the Federal Reserve enters a rate cut cycle, the firm continues to favor Hong Kong property developers while turning bearish on Hong Kong banks. UBS expects that the trend of banks outperforming property developers since interest rate hikes began in 2022 will start to reverse as the rate cut cycle unfolds. The firm believes Hong Kong banks may face pressure from rising commercial real estate (CRE) loan provisioning expenses and rate cuts compressing net interest margins (NIM).
The first-half earnings disclosure period has largely concluded. Among the 49 Hong Kong-listed companies covered by the firm (with a total market capitalization of approximately $1 trillion), about 98% have disclosed first-half results. Overall, first-half net profit declined 7% year-over-year, although revenue grew 4% year-over-year, with revisions to 2025 earnings forecasts remaining largely neutral. More than half of the companies met expectations, but slightly more companies underperformed than outperformed expectations.
The financial sector performed outstandingly, mainly benefiting from favorable market conditions and non-interest income exceeding expectations. Conversely, Macau gaming, airlines, and utilities saw more underperformance due to overly high earnings expectations. The diversified financials and Macau gaming sectors recorded the most positive 2025 earnings per share forecast revisions, up 7%-25% from June forecasts, while banks and insurance were revised down 5%.
The market expects the Federal Reserve to begin rate cuts in September. Since HIBOR entered an upward trend in December 2021, bank stocks have cumulatively outperformed Hong Kong property stocks by 80%. Currently, bank stocks trade at a price-to-book ratio 163% higher than Hong Kong property stocks, which is also 1.6 standard deviations above the historical average. The firm believes the upcoming rate cut cycle will drive this outperformance to reverse.
Meanwhile, recent acceleration in Macau's gross gaming revenue has increased confidence in the sustainability of its revenue momentum, mainly driven by high-end customer demand with low sensitivity to the macroeconomic environment. Therefore, the firm has added Wynn Macau and Galaxy Entertainment to its most recommended list.
UBS has simultaneously removed CKI Holdings (01038) and CLP Holdings (00002) from its most recommended list due to the lack of near-term catalysts.