Hang Seng acting irrationally.
It makes one wonder when a stock market index recovers from its biggest decline in almost 4 years in less than a week. What's going on?
Hang Seng Index Performance
There was undoubtedly some forced selling in the early August weeks raising out of the US credit crisis -- liquidation of equity assets to cover the panicked CDO investors running to government treasuries -- and emerging markets tend to be the first ones to go. Doubts on the future of US economy growth in an export laden region also plays a factor.
A bounce back was expected given the index dropped down to where it was 7 months ago. The US Federal Reserve at least momentarily calmed the markets with a policy change from long term inflation focus to short term credit market events easing the concern on US economy and raising the speculation of interest rate cut.
The speed of which the bounce back occurred with Hang Seng is surprising though, and an exception to other market indices. It makes one wonder about this aura of invincibility emanating from Hong Kong. Getting past the buy-in opportunity to cheaper stocks and US Fed action to stabilize the credit market, what else happened last week?
It's a closed economy
The other bit of news that almost got drowned in the flood of credit crunch misery was China's opening the doors slightly to domestic investors seeking to enter foreign exchange markets, and through them access to international securities. This is a big move in China which traditionally has a closed economy -- foreign investors are rather severely limited from investing in China's domestic market (A-shares) while Chinese domestic investors have had limited access to international markets.
What this has led to is the over-priced valuations in Shanghai's domestic A-shares. If you think Hang Seng has been a bit of a roller coaster lately, it pales in comparison to China's internal markets. It looks as if China is keen to beat the dot-com bubble of 2001. Negative real interest rates are pushing more liquidity with nowhere to go except the already over-priced equities. Further, a lot of this liquidity is coming from retail investors investing their pension savings with high risk to speculative market which is bound to ignite panic selling when revaluation occurs.
The latter is an issue of concern for the Chinese government. People losing their savings in a stock market crash creates a serious threat of social unrest in the country. That would not look so good while China is in the middle of the 2008 Olympics PR campaign busy selling the country to foreigner investors. The Chinese government has been trying to curtail the retail investor mania by restricting bank lending to consumers to prevent leveraged equity investments. This only caused a move to consumer credit card debt to finance the stock purchases. When maids, teachers, cab drivers are quitting their day jobs to become day traders, it is not difficult to conclude that the Chinese economy is a tightly lid, hot boiling pot ready to spill over.
Cure or a poison pill?
The move to open Hong Kong to Chinese mainland investors is then an effort to let some of the steam safely out of the domestic market. It comes at a time though when the global markets are still in a turmoil over the effects of the sub-prime crisis. And only a few think that crisis is over yet. The speculation is raging on how much of the bad debt is still in line to mature over the next few weeks and months and what will the effects of potential sell-off to cover the losses in fixed income be on the equity market. Remember, emerging markets tend to be the first ones to go. Given the draw back on global equities, how much of the Hang Seng recovery is due to short term liquidity to create gains in the best performing equity market just to cover the inevitable debt losses?
The second inevitable effect of the change is the closing of the gap between China's domestic and Hang Seng listed security valuations. Shanghai is trading at an eye-popping 46 P/E average (liquidity has nowhere else to go) where as Hang Seng is still at a more reasonable, compared to mainland, 19 P/E average. China's domestic market has long ago given up on fundamentals and is driven by liquidity and speculation.
Hang Seng Volumes
Looking at the last couple of weeks of Hang Seng makes you wonder whether the index is moving on a short term hedge speculation or by Chinese liquidity pouring over. And if it is the latter, will Hong Kong be able to consume it, or will it get engulfed in the Chinese bubble itself?
Hang Seng Index PerformanceA bounce back was expected given the index dropped down to where it was 7 months ago. The US Federal Reserve at least momentarily calmed the markets with a policy change from long term inflation focus to short term credit market events easing the concern on US economy and raising the speculation of interest rate cut.
The speed of which the bounce back occurred with Hang Seng is surprising though, and an exception to other market indices. It makes one wonder about this aura of invincibility emanating from Hong Kong. Getting past the buy-in opportunity to cheaper stocks and US Fed action to stabilize the credit market, what else happened last week?
It's a closed economy
The other bit of news that almost got drowned in the flood of credit crunch misery was China's opening the doors slightly to domestic investors seeking to enter foreign exchange markets, and through them access to international securities. This is a big move in China which traditionally has a closed economy -- foreign investors are rather severely limited from investing in China's domestic market (A-shares) while Chinese domestic investors have had limited access to international markets.
What this has led to is the over-priced valuations in Shanghai's domestic A-shares. If you think Hang Seng has been a bit of a roller coaster lately, it pales in comparison to China's internal markets. It looks as if China is keen to beat the dot-com bubble of 2001. Negative real interest rates are pushing more liquidity with nowhere to go except the already over-priced equities. Further, a lot of this liquidity is coming from retail investors investing their pension savings with high risk to speculative market which is bound to ignite panic selling when revaluation occurs.
The latter is an issue of concern for the Chinese government. People losing their savings in a stock market crash creates a serious threat of social unrest in the country. That would not look so good while China is in the middle of the 2008 Olympics PR campaign busy selling the country to foreigner investors. The Chinese government has been trying to curtail the retail investor mania by restricting bank lending to consumers to prevent leveraged equity investments. This only caused a move to consumer credit card debt to finance the stock purchases. When maids, teachers, cab drivers are quitting their day jobs to become day traders, it is not difficult to conclude that the Chinese economy is a tightly lid, hot boiling pot ready to spill over.
Cure or a poison pill?
The move to open Hong Kong to Chinese mainland investors is then an effort to let some of the steam safely out of the domestic market. It comes at a time though when the global markets are still in a turmoil over the effects of the sub-prime crisis. And only a few think that crisis is over yet. The speculation is raging on how much of the bad debt is still in line to mature over the next few weeks and months and what will the effects of potential sell-off to cover the losses in fixed income be on the equity market. Remember, emerging markets tend to be the first ones to go. Given the draw back on global equities, how much of the Hang Seng recovery is due to short term liquidity to create gains in the best performing equity market just to cover the inevitable debt losses?
The second inevitable effect of the change is the closing of the gap between China's domestic and Hang Seng listed security valuations. Shanghai is trading at an eye-popping 46 P/E average (liquidity has nowhere else to go) where as Hang Seng is still at a more reasonable, compared to mainland, 19 P/E average. China's domestic market has long ago given up on fundamentals and is driven by liquidity and speculation.
Hang Seng VolumesLooking at the last couple of weeks of Hang Seng makes you wonder whether the index is moving on a short term hedge speculation or by Chinese liquidity pouring over. And if it is the latter, will Hong Kong be able to consume it, or will it get engulfed in the Chinese bubble itself?
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1 comments:
Thanks for writing this.
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