Asian Recovery?

Henry C.K. Liu hliu at mindspring.com
Sun May 23 21:24:36 PDT 1999


24 May 1999

Why HK stocks sliding

Punters run out of reasons to buy overvalued

companies

PUNTERS looking to buy the Hongkong market

are increasingly finding themselves running short

of both reasons and valuations. With no real good

news in the market, the plots for "theme buying" are

getting thinner by the day, while price-earnings multiples

are fast running ahead of fundamentals.

Indeed, other than taking the increasing risks of joining

in the senseless punting in technology-related and other

second-line counters, investors have few compelling

reasons to enter the market at current levels. Under such

circumstances, investors' attention invariably returns to

interest rates where, unfortunately, the much-touted

prospects of more rate cuts are now being eroded as

well.

True, the US Federal Reserve Board has taken the

politically correct route of not raising rates based on one

month's price data even though everyone knows well

that the US consumption-led boom may have

overstayed. But come next month, a further

confirmation in May's inflation figures could set the Fed

on a contractionary mode again, giving Hongkong banks

little room to add an eighth cut since October to its

lending rates.

Any tightening up in interest rates could do much

damage to Hongkong big-cap stocks, which have already

put on good price gains in the last six months. There are

indeed reasons for HSBC's return to reality at HK$255

now after surging to a high of HK$293 last month.

Incidentally, the rally in Hongkong led by mega-stocks

such as HSBC, Hutchison Whampoa and Hongkong

Telecom may have been too narrowly-led as foreign

funds entered mostly liquid stocks and ignored small-cap

stocks.

While the successful land auction last month yielded

some excitement over the real estate companies, the

property market would at best still remain stable. Despite

stronger primary sales, property companies are unlikely

to see any bigger margins in the near term, and results

for 1999 would remain satisfactory thanks to smaller

asset provisions.

Really, if Li Ka-shing is consistently calling for more

land sales and lower property prices, the real estate

sector may find it difficult to outperform in the near

future. After all, Mr Li -- who was praised by Chinese

President Jiang Zemin last week -- is still the most

powerful man in Hongkong, according to Asiaweek,

outranking even Chief Executive Tung Chee-hwa and

Financial Secretary Donald Tsang.

Banks, on the other hand, are clearly not out of the

woods yet. Provisions are expected to rise as bad debts

are expected to increase simply with the passage of time,

as much of the troubled assets emerged from late last

year and were not captured in 1998 results.

The current price war among mortgage sellers is

squeezing margins on their best performing asset, which

is supposed to help offset the slowdown in the lending to

other sectors. Any rise in interest rates -- with short-term

rates already showing some firming -- would indeed put

enormous pressure on bank and property conglomerates.

Meanwhile, those who have been punting in the

second-liner casino are also getting nervous. For one,

those in the know are beginning to sell their own stocks.

According to Robert Halli of Asian Ownership Research

at Primark, directors of the so-called high technology

stocks have been mostly selling their shares in the past

month. Thirteen companies have reported director sales

in the sector since last month, representing almost 9 per

cent of the HK$574 million (S$127 million) sold by all

directors.

Much of the buying in the small companies has been

speculative. More than two dozen of these companies --

when queried by the stock exchange about the sudden

sharp rises in activity or price -- said they were unaware

of the reasons for such increases. Blinded by herd

instincts and with the blue chips having made their runs,

retail investors were simply pounding away in the

small-cap sector on borrowed time.

Further down the speculative chain, Chinese-linked

counters are also now fast being shunned as details on

Guangdong Enterprises' restructuring are expected to

emerge this week and things could look ugly.

Many have also argued that the macroeconomic outlook

would improve from the third quarter and this could lead

to better valuations for the market. But so far, we

haven't seen anything encouraging on the broader

economy other than some robust tourist and hotel figures

which may not be enough to generate the spending

needed. Unemployment, meanwhile, has reached a

record 6.3 per cent. Also, the few mega projects such as

the Tseung Kwan O MTRC project and the Cyberport

are not expected to increase economic activity early

enough to boost the market. Across the border, there

isn't much good news coming out from the mainland

economy either.

With the only thing going for the market being the

shortage of free float, investors would have to pray hard

for a longer holding period by the government of the 15

per cent of public scrip, for the market to sustain its

current levels. Otherwise, investors choosing to ignore

this much-needed consolidation would have to be very

nimble to make money out of this bourse.



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