Bubble Fears In Hong Kong

Market bullish but analysts warn of crash



















THE dramatic rise in Hong Kong share prices over the past two months has sparked fears the market is experiencing a Chinainspired bubble, with analysts warning it is about to burst.

With share prices on the main Hang Seng index having increased 36 per cent since Aug 22, crashing through the 30,000-point barrier briefly on Thursday, onlookers say all the warning signs of a severe tumble are evident.

Morgan Stanley released a report last Thursday downgrading its market view of Hong
Kong to “cautious”, saying: “We remain bullish on the fundamentals,
but the magnitude of growth/returns/liquidity required to justify the current valuations has become untenable.”

The report added that market valuations were now on average 22 times that of earnings, and the market, which is experiencing its longest bull run ever from its Sars-inspired low in April 2003, was overstretched.

Morgan Stanley believes this is comparable to the 2000 tech bubble. “China stocks now have plenty in common with the Nasdaq bubble in 2000,” it warned. It says there is a 30-per-cent chance the index could fall to 24,000 in the next three months.

Mr David Webb, a shareholder activist who has been pushing for reform in the Hong Kong market since the Asian financial crisis, says the current picture is “very much” a bubble.

A recent survey of users on Mr Webb’s campaigning website (Webb-site.com) showed that most people believe the market could fall back to 14,000 points.

The trigger for the recordbreaking rise in recent months was the announcement by Chinese officials that they would allow mainland individuals to invest in Hong Kong.

Despite the lack of concrete details of the scheme — supposedly limited to account holders at one bank in Tianjin — and with no firm date fixed for its implementation, money has poured into equities in Hong Kong.

Investors believe the huge liquidity slopping around Chinese markets will quickly make its way to Hong Kong, bumping up prices and creating a replication of the soaring Shanghai market.

But Mr Webb disagrees. He believes the scheme will either be very limited, with nowhere near the level of liquidity many expect, or so successful it will drain cash from the mainland markets, triggering a correction there which will echo in Hong Kong, as the success of both markets is based on Chinese firms, often listed in both cities.

The Morgan Stanley report backs up the assertion, believing the liquidity has already arrived. Other onlookers believe Chinese cash has already made its way here, often illegally.

But others say the volatility in recent weeks has actually shown that there is solid support for the current valuation and there will be no repeat of the crash that hit the bourse ten years ago.

Fulbright Securities’ general manager Francis Lun said that as long as companies continued to produce spectacular figures, the Hong Kong market would keep thriving and any correction would be minor. — AFP