Hong Kong's Hang Seng Index (HSI) rallied sharply following the Chief Executive Carrie Lam's first concession to protesters' demands to completely withdraw the extradition bill. But between the olive branch and protest starting point, the market is only down around 4%.

So where should investors focus and what do they need to know? Here are three things that investors should be aware of about the ongoing unrest and its impact on the Hong Kong market.

An image of the Hong Kong skyline.

Image Source: Getty Images.

1. Markets initially rallied in June                                                   

Hong Kong markets actually climbed higher during the initial weeks of mass protests, as peaceful demonstrations allowed investors to focus elsewhere. But as protests became more confrontational, markets began to wobble.

Already facing downward pressure, stocks encountered a precipitous drop after the People's Bank of China (China's central bank) allowed the RMB to weaken past the psychologically important point of 7 to the US dollar.

The event fed more tariff threats from the US President Trump and removed any possibility for a near-term truce. Between the end of July and the middle of August, the HSI fell more than 10%, erasing earlier gains. The 4% drop between the protest start to the concession masks the pressure facing investors.

2. Hong Kong's economy was already weak

Hong Kong's trade-dependent economy had few growth drivers running when the protests began, shrinking 0.4% from the first quarter of the year. From an initial annualized growth estimate of 2-3%, Hong Kong was relying on both a trade and tourism recovery which never materialized.

The challenge was exacerbated when the property sector, which is highly linked to the city's economy, saw developers cut prices to push inventory to the market earlier.

Hong Kong's protests compounded this slowdown, with retail sales falling 6.7% in June and 11.4% in July. Tourism numbers dropped 5% in July, with the August number expected to contract almost 40% when protesters congregated at the airport. With little good news, the government downgraded the outlook to 0-1% for the year.

3. Second-quarter earnings only include three weeks of protests

Using first-half or second-quarter earnings as a barometer of Hong Kong's business climate is of limited use. While they do take into account the weaker global growth backdrop and decelerating Chinese demand, the problem lies in the fact that they only three weeks of the protests (and at a time when they were relatively peaceful too).

In the first half of the year, Cathay Pacific Airways Ltd (SEHK:293) announced net profit of HK$1.3 billion with passenger revenue growth up 5.6%, but the airline carrier said it suffered from a double-digit fall in ticket sales due to the protests. Macau's gross gaming revenue (GGR) dropped 0.5% for the six months to June, with second-quarter GGR down 1%. Macau's tourism numbers remain robust but this has yet to translate into GGR growth.

Meanwhile, Bank of East Asia Ltd (SEHK:23), one of Hong Kong's local banks, reported a 75% plunge in first-half profits due to writedowns in China, issuing a warning that further protests could have a negative impact on small- and medium-sized enterprises.

Even as the US Federal Reserve cuts interest rates, banks are facing tighter monetary conditions, creating default risks in the property market. Hysan Development Company Limited (SEHK:14), the biggest landlord in the Causeway Bay shopping district, said that overall sales are likely to have fallen by at least 10% in July on account of the demonstrations.

Foolish last thought

Chinese investors buying via the stock connect have climbed to almost HK$160 billion for the first nine months of the year, nearly double that of 2018. Besides the valuation argument and discount spread to mainland shares, buying equities in HKD is a hedge against a falling RMB.

Assessing and determining the exact impact of the protests on Hong Kong's economy is hard. Despite the Chief Executive's concession, protests are still ongoing and unlikely to abate quickly.

Hong Kong, which was already grappling with other factors out of its control, must now fix a domestic crisis that is likely to continue into the final months of the year. For company earnings, "winter is coming" and investors need to be selective but, having said that, there will probably be opportunities for long-term investors to pick up quality stocks on the cheap.

A version of this article originally appeared on our Fool Asia site. For more coverage like this head over to Fool.hk.en.