Download Analysis of the Recent Rebound in Market Turnover

Research Paper No. 8
Analysis of the Recent Rebound in Market Turnover
Joseph Lee and Joanna Poon1
July/August 2003
Executive Summary
The recent rebound in market turnover was in part attributable to price effect, an
increase in trading activities of Mainland stocks, an increase in HSI Futures related
transactions and an increase in trading activities of derivative warrants. There has
been a spike in market turnover in the middle of each year since 2000. These spikes
were mainly due to isolated incidents taking place in the middle of each year rather
than a seasonal pattern. Past experience indicated that whether the recent rebound
can be sustained depends, among other factors, on the economic growth.
The Recent Rebound in Market Turnover
•
•
The average daily turnover in the second quarter was HK$7.9 bn, rising 33% from
the first quarter when the average daily turnover was HK$6.0 bn.
Among other factors, the recent rebound in market turnover was attributable to
price effect;
an increase in trading activities of Mainland stocks2;
an increase in HSI Futures related transactions; and
an increase in trading activities of derivative warrants.
Price Effect
•
•
1
2
3
The HSI at the end of the second quarter was 11% higher than that at the end of
the first quarter. During the first half of 2003, the HSI peaked at 10,030 on 17
Jun.
At constant prices3, the estimated average daily turnover in the second quarter
would be 20% higher than that in the first quarter.
Mr Joseph Lee is the Senior Manager and Miss Joanna Poon is the Executive Trainee of the
Research Department of the Supervision of Markets Division, SFC. Views expressed in this paper
are the authors’ and do not represent those of the SFC. Readers are free to use the information
contained in this paper, but any usage should not be attributed to the SFC.
Mainland enterprises include H-share and red-chip companies; the former refers to state-owned
enterprises listed in Hong Kong, whilst the latter refers to companies with at least 35%
shareholding held in aggregate directly and indirectly by Mainland China entities. This follows
the definition adopted by HKEx.
Constant prices are derived from deflating market turnover by the HSI at the end of the second
quarter 2003. Therefore, market turnover at constant prices in this paper is an estimate of turnover
at end second quarter prices.
Research Paper No. 8
Mainland Stocks
•
•
Another factor was the increase in trading activities in Mainland stocks. The
average daily turnover of Mainland stocks in the second quarter was HK$2.7 bn,
rising 32% from the first quarter when the average daily turnover was HK$2.0 bn.
The increase was in line with the market as a whole and could possibly reflect the
relatively better performance of the H-share and red-chip indices during the
second quarter. As of the end of Jun, the H-share and red-chip indices were 25%
and 17% respectively higher than at the end of the first quarter, and were higher
than the gain of the HSI.
HSI Futures Related Transactions
Chart 1 – Turnover of HSI Futures (Q1 2000 – Q2 2003, mn contracts)
1.8
1.6
1.4
1.2
1.0
2003 Q2
2003 Q1
2002 Q4
2002 Q3
2002 Q2
2002 Q1
2001 Q4
2001 Q3
2001 Q2
2001 Q1
2000 Q4
2000 Q3
2000 Q2
2000 Q1
0.8
Sources: HKEx and Reuters
•
•
•
•
4
The third factor could be the increase in HSI Futures related transactions. The
turnover of HSI Futures was 1,629,945 contracts in the second quarter (Chart 1),
rising a 19% from the first quarter when the turnover was 1,366,915 contracts.
In notional value, the turnover of HSI Futures was HK$746.2 bn in the second
quarter, also rising a 19% from the first quarter when the notional value was
$629.0 bn.
To the extent that part of the increase was due to arbitrage and hedging activities,
the rise in the turnover of HSI Futures would reflect turnover on the cash market.
According to HKEx’s Derivatives Market Transaction Survey 2001/2002, 8.7%
and 23.4% of the turnover of HSI Futures were attributable to arbitrage and
hedging activities4.
A previous research paper (Research Paper No. 3) entitled Arbitrage Activities Between HSI Stocks
and HSI-Related Derivatives Products gives an exposition in the arbitrage activities between HSI
stocks and HSI-related derivatives products. The paper is downloadable from the SFC website
http://www.hksfc.org.hk/eng/statistics/html/index/index0.html.
Research Paper No. 8
Derivative Warrants
Chart 2 – Average Daily Turnover of Cash Market and Derivative Warrants (2003
Jan = 100)
200
Derivative warrants
Main Board
180
180
Main Board (LHS)
160
200
160
Derivative warrants (RHS)
140
140
120
120
100
100
80
80
Jan-03
Feb-03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Source: HKEx
•
•
The fourth factor is the increase in trading activities of derivative warrants (Chart
2). As of the end of Jul, 288 derivative warrants were listed. The average daily
turnover of derivative warrants amounted to HK$864 mn in Jul (9.0% of the total
market turnover). These compared to 315 derivative warrants listed at the end of
Jan, with an average daily turnover of HK$453 mn in Jan (7.7% of the total
market turnover). In fact, HKEx’s warrant market was the world’s most active in
terms of turnover in the first five months of 2003.5
Issuers have introduced exotic derivative warrants which are more sophisticated
and are primarily designed for more sophisticated investors. An “X” symbol is
included in its name to differentiate exotic derivative warrants from traditional
derivative warrants6. As of the end of Jul, 61 exotic derivative warrants were
listed, with an average daily turnover of HK$109 mn in Jul (13% of the turnover
of all derivative warrants). These compared to 25 exotic derivative warrants listed
at the end of Jan, with an average daily turnover of HK$21 mn in Jan (4.6% of the
turnover of all derivative warrants) (Chart 3).
Chart 3 – Average Daily Turnover of Traditional Derivative Warrants and Exotic
Derivative Warrants (2003 Jan = 100)
700
Traditional
Exotic
700
600
600
500
500
400
400
Traditional derivative warrants (LHS)
300
Exotic derivative warrants (RHS)
300
200
200
100
100
0
0
Jan-03
Feb-03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Source: HKEx
5
6
This is from HKEx’s Publication Exchange, the July 2003 issue, page 11-13.
Both the SFC and HKEx have published educational articles on exotic derivative warrants which
are available from their websites.
Research Paper No. 8
Spikes in Market Turnover in Mid-Year
•
There has been a spike or a rebound in market turnover taking place in the middle
of each year since 2000.
For instance, after the tech bubble burst in early 2000, market turnover picked
up to HK$13.7 bn in Jul 2000 (1 on Chart 4). This was 32% higher than a
month earlier.
The next spike took place in Jun 2001 when the market turnover was HK$10.7
bn (2 on Chart 4). This was 11% higher than a month earlier.
Another spike occurred in May 2002 as the market turnover rebounded to
HK$9.5 bn (3 on Chart 4). This was 30% higher than a month earlier.
The fourth rebound took place in Jun 2003 when the market turnover was
HK$8.7 bn in Jun 2003 (4 on Chart 4). This was 9.0% higher than a month
earlier.
Chart 4 – Average Daily Turnover on HKEx (Jan 2000 – Jun 2003, HK$ bn)
25
20
1
15
2
3
10
4
5
2000 01
2000 02
2000 03
2000 04
2000 05
2000 06
2000 07
2000 08
2000 09
2000 10
2000 11
2000 12
2001 01
2001 02
2001 03
2001 04
2001 05
2001 06
2001 07
2001 08
2001 09
2001 10
2001 11
2001 12
2002 01
2002 02
2002 03
2002 04
2002 05
2002 06
2002 07
2002 08
2002 09
2002 10
2002 11
2002 12
2003 01
2003 02
2003 03
2003 04
2003 05
2003 06
0
Sources: HKEx and Reuters
Nevertheless, these spikes have not taken place prior to 2000, showing that this is
unlikely to be a seasonal pattern (Chart 5).
Chart 5 – Average Daily Turnover on HKEx (Jan 1996 – Dec 1999, HK$ bn)
35
30
25
20
15
10
5
Sources: HKEx and Reuters
1999 11
1999 09
1999 07
1999 05
1999 03
1999 01
1998 11
1998 09
1998 07
1998 05
1998 03
1998 01
1997 11
1997 09
1997 07
1997 05
1997 03
1997 01
1996 11
1996 09
1996 07
1996 05
1996 03
0
1996 01
•
Research Paper No. 8
•
These spikes were mainly due to isolated incidents taking place in the middle of
each year rather than a seasonal pattern.
In 2000, the rebound in market turnover in Jul was possibly attributable to the
massive fund raising activities such as China Unicom and HKEx over that
period.
In 2001, the opening up of the B-shares markets in the Mainland subsequently
propelled the trading of Mainland stocks on HKEx.
In 2002, the spike was largely due to price effect as the HSI peaked in the
month.
In 2003, the rebound in turnover was due to price effect, an increase in trading
activities of Mainland stocks and an increase in HSI Futures related
transactions. Moreover, it is not certain whether such a rebound will be
continued over a sustained period and this will depend, among other factors,
on the performance of the economy.
Market Turnover and Economic Growth
•
•
Among other factors, market activities move in line with economic growth7. A
review of economic cycles over the past 20 years or so indicated that the two were
positively correlated.
For the previous four economic cycles, the correlation coefficient between market
turnover and economic growth averaged 73%, with a range of 57% to 87%
(Charts 6-9). These charts show that alongside with the continuous pick up in
economic growth, the rebound in market turnover has largely been sustained for
several quarters. This is in contrast to the spikes that took place for a few months.
Chart 6 – Average Daily Turnover (HK$ bn) and Nominal GDP Growth (%) During 1986
Q1 – 1988 Q4
2.5
HK$ bn
% 28
Correlation Coefficient = 79%
GDP Growth (RHS)
2.0
21
1.5
Market Turnover (LHS)
14
1.0
7
0.5
0.0
n.a.
1986
Q1
0
1986
Q2
1986
Q3
1986
Q4
1987
Q1
1987
Q2
1987
Q3
1987
Q4
1988
Q1
1988
Q2
1988
Q3
1988
Q4
Remark: Figures on average daily turnover began on 4 April 1986
Sources: C&SD, SFC Research and HKEx
7
Economic growth refers to an increase in GDP. Since market turnover is in current prices, GDP
here is also based on current prices.
Research Paper No. 8
Chart 7 – Average Daily Turnover (HK$ bn) and Nominal GDP Growth (%) During 1990
Q1 – 1992 Q4
4.0
HK$ bn
3.5
20
%
Correlation Coefficient = 68%
18
GDP Growth (RHS)
3.0
2.5
2.0
16
Market Turnover (LHS)
14
1.5
1.0
12
0.5
0.0
10
1990
Q1
1990
Q2
1990
Q3
1990
Q4
1991
Q1
1991
Q2
1991
Q3
1991
Q4
1992
Q1
1992
Q2
1992
Q3
1992
Q4
Sources: C&SD, SFC Research and HKEx
Chart 8 – Average Daily Turnover (HK$ bn) and Nominal GDP Growth (%) During 1995
Q1 – 1997 Q4
26 HK$ bn
% 18
Correlation Coefficient = 57%
22
15
GDP Growth (RHS)
18
12
14
9
Market Turnover (LHS)
10
6
6
3
2
1995
Q1
1995
Q2
1995
Q3
1995
Q4
1996
Q1
1996
Q2
1996
Q3
1996
Q4
1997
Q1
1997
Q2
1997
Q3
1997
Q4
Sources: C&SD, SFC Research and HKEx
Chart 9 – Average Daily Turnover (HK$ bn) and Nominal GDP Growth (%) During 1998
Q1 – 2000 Q4
20
HK$ bn
%
Correlation Coefficient = 87%
15
GDP Growth (RHS)
10
10
5
0
Market Turnover (LHS)
5
-5
0
-10
1998
Q1
1998
Q2
1998
Q3
1998
Q4
Sources: C&SD, SFC Research and HKEx
1999
Q1
1999
Q2
1999
Q3
1999
Q4
2000
Q1
2000
Q2
2000
Q3
2000
Q4