More pain, more gain
Date : JAN 03, 2001
Stephen Vines
Because it is mean to start the new year on a churlish note, we shall draw a veil of silence over all those analysts who came out with a bullish predictions for the year 2000 at this time last year. The bulls were in a majority so there is plenty of company for those who got it wrong.
As everyone knows, far from rising on the back of recovering corporate profits, a belief in a more healthy economy and hopes of business flowing from China's accession to the WTO, the Hong Kong stock market ended the year with the Hang Seng Index down 11 per cent.
Hong Kong's fall was greatly exacerbated by the performance of one stock, yes, you've guessed right, we are talking about Pacific Century CyberWorks. Before this overblown company took over Cable & Wireless HKT, the combined market capitalisation of the two entities was over $600 billion, PCCW is now valued at around $110 billion. The share price is 72 per cent down over the year.
PCCW's friends, a small numerically challenged group, say that the company's performance is really no more than a reflection of the general global telco sell-off. This is simply not true. PCCW is right there at the top of the league of worst performing telco shares alongside NTT Data of Japan and British Telecom. Most international telco companies saw their share value decline in a range of 20-30 per cent, which is bad but no where near as bad as PCCW's performance.
The fate of PCCW and that of the Hong Kong market in general demonstrates the good sense of investors. They have failed to swallow the economic recovery story, they are still braced for shocks to the system and when it comes to PCCW they can see a house of cards vulnerable to the smallest ill winds.
It may be argued that investors everywhere began showing better sense last year. They took fright over the looming United States recession and they drove down markets with massive sell offs of hi-tech shares. Moreover they began to remember the less than exciting but somehow reassuring concept of investing in bonds. Against this background practically every market in the world registered a price fall last year. The Morgan Stanley Capital International Index (MSCI) recorded its first fall since 1992 for world stock markets outside the US. In dollar terms (which is a bit problematic because of the unusual strength of the US Dollar), the index was down over 16 per cent, the worst fall since 1990 when it fell 24 per cent.
The biggest sell offs came from this region with the Korean market down over 50 per cent, Thailand down 45 per cent, Taiwan down 44 per cent, Indonesia off 38 per cent and the Philippines off 31 per cent.
Compared to its neighbours Hong Kong did all right but compared to China the performance was not impressive. The figure that has got everybody excited is the 136 per cent rise in the price of Shanghai B shares. This figure has been pushed out around the world as representing something called the Chinese stock market. This is misleading because most of the Chinese markets performed far less well. A shares in Shanghai were up 51 per cent, while in Shenzhen B share values rose 63 per cent and A shares were up 58 per cent.
However even the worst performing of the Chinese markets remained as the best performing of the world markets. The only problem is that the stellar rise of Chinese share prices is practically meaningless. In the B share sector, reserved for overseas investors and those with foreign currency, turnover is so small as to be vulnerable to endless distortion. Over in the A share department, where most of the action is concentrated among domestic Chinese investors, turnover is vast but prices are largely influenced by government rather than market determined supply and demand forces. The government has limited the supply of shares coming from the partial privatisation of the state enterprise sector and thus ensures a healthy trade in the relatively small number of shares on issue.
Therefore it matters little if the Chinese market rises or falls many times over because it is not really a free market and is widely shunned by serious investors. Indeed this year's world market performance league table is best ignored by investors looking for value. This certainly applies to leaping into the Chinese market but on the flip side of the coin also applies to the laggards, such as Korea, which is home to severely undervalued companies.
The coming year is likely to be dominated by an outbreak of good sense with more and more investors looking for value. This may well mean a fairly dull year for market performance but it should be a good time for quality companies, some of which will be very cheap during the course of the year.
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