Hong Kong investors can hardly wait for this year's second half; then, the market is widely expected to revive.
But for now, that red-hot market of 1993 remains mired in gloom. After tumbling about 33% in 1994, Hong Kong's market now stands roughly 40% below its January, 1994 peak, and some investors are treating the market as if it were diseased.
Many brokerage firms are less than enthused. Late in December, New York-based Salomon Brothers lowered to 20% from 30% its recommended weighting to Hong Kong for Asia-minus-Japan portfolios. Measured for available liquidity, Hong Kong's market ranks 39 out of the 47 countries assessed by Baring Securities, London. Baring believes the Hong Kong market looks bearish for at least the next six to 12 months.
Investors agree on the host of problems besetting Hong Kong - expected higher interest rates resulting from more rate hikes in the United States (the Hong Kong dollar is pegged to the U.S. currency); forecasts of lower corporate profits in 1995; concern about economic conditions in neighboring China; the possibility of a trade war between the United States and China; and fears that ailing Chinese leader Deng Xioping may soon die. Many worry Mr. Deng's death will trigger a power struggle in Beijing that would reverberate in Hong Kong.
But for now, the biggest issues center on rising interest rates. This year, higher rates are expected to eat into corporate profits - and take a sizable bite out of the property sector, which has substantial representation on the Hong Kong Stock Exchange. Not only have a number of Hong Kong property companies been cutting their asking prices on property as rates climbed, but also more rate hikes and price cuts are expected soon. Profits in the property sector are expected to be hit in the second half of 1995 and into 1996.
But at some point, stock prices finally will reflect all of this bad news, and buying will resume. The lingering question is when.
For Edinburgh, Scotland-based Blairlogie Capital Management, December was the time to start buying more Hong Kong shares. Admittedly early into the market, the firm began lifting its Hong Kong exposure from a two to three percentage point underweighting (about a 24% exposure) to a fractional overweighting now (about 27.5%) in an Asia-minus-Japan portfolio, said portfolio manager Hugh Ferrand.
Blairlogie wanted to avoid the rush back into the market.
But after stock prices eroded further, the firm put additional stock buying in Hong Kong on hold for the time being. Nonetheless, Mr. Ferrand believes that at current levels in the Hang Seng Index (the mid-7,000s), the market shouldn't "get much lower."
HSBC Asset Management Americas Inc., New York, is "almost certainly looking to accumulate (Hong Kong shares) at these levels," said CEO Stan Vyner. Ordinarily, the firm tends to be overweighted in Hong Kong. In part, that's because the firm chooses not to keep a market-capitalization weighting in Japan - leaving room for overweighting in selected markets. The firm specifically likes Hong Kong because "it's a catalyst for China's tremendous (growth) prospects," he explained.
But many other managers are sidelined for now. In quite a few cases, they're waiting for the Federal Reserve again to tighten U.S. monetary policy. Then, based on the level of the Fed's aggressiveness in raising rates, they'll decide whether yet higher interest rates await, and how long it will take the market to absorb all these rate rises.
Right now, Dunedin Fund Managers in Edinburgh has no exposure to Hong Kong in its global portfolios. Investment director Gordon Anderson thinks "until we see a peak in U.S. short-term rates, I doubt if we'll become more positive on Hong Kong."
However, if U.S. rates are raised as much as 75 basis points in January or February, they may then be close to a peak. In that case, the firm would "look seriously at Hong Kong," Mr. Anderson said.
Andrew Kim, chief investment officer of Sit/Kim International Investment Associates, New York, "is still defensive on Hong Kong," he said. "We are waiting for two developments to unfold: the higher U.S. interest rate cycle to have its full impact on the property cycle in Hong Kong," and more optimism to emerge about the economy of mainland China.
As for the former issue, he expects commercial and residential property prices could fall by more than another 10%. And in China, he believes there is growing recognition of the need to crack down strongly on inflation. While that could cause a hard economic landing in this year's second half, he believes China may be grasping what needs to be done about inflation.
All in all, Mr. Kim expects investors should be looking more favorably on Hong Kong by midyear.
They "should be able to find attractive valuations relative to the (market's) long-term prospects," he said.
Carol Chuang, senior portfolio manager of the Matthews Pacific Tiger Fund of San Francisco's Matthews International Capital Management, is "cautious regarding Hong Kong" because that market is "very dependent on the performance of the property sector." She expects to remain cautious during at least January and February. But if the U.S. federal funds rate went up by , "say, another 50 basis points this time," rates "would be approaching their top," she believes. And that could be a signal for investors to do some selective buying.
Ms. Chuang already favors such Hong Kong blue chips as Hong Kong Land (which, she reports, is due to be delisted in March and relisted in Singapore) and some smaller companies as clothier Esprit Asia and JCG Holdings in finance and banking.
Frederick Zhang, managing general partner of Claflin-China Partners of Claflin Capital Management Inc., Boston, invests in Chinese companies; in Hong Kong, he could invest in H shares (Chinese companies listed in Hong Kong) and "red chips" (Hong Kong companies with a parent in China).
"My present opinion is that it's a very good time to buy" these, said Mr. Zhang. Despite a midyear rally, H shares tumbled in price in 1994, ending the year with average losses that exceeded the overall market.
But Mr. Zhang expects Chinese companies to benefit from economic improvements this year. While China's real gross domestic product growth should be about 10%, inflation should cool to around 13% to 15% from 24.2% in 1994, forecasted Mr. Zhang.