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.