Another e-mail
A few thoughts:
Many simply hedge their long equity positions by shorting futures. Can work if you're long index stocks, but if you move towards the smaller caps, it can be disastrous - see hedge fund results in Japan.
In places like Korea, you can hedge quite effectively in many cases by buying puts. Options market in Korea is unusually deep and liquid.
It appears from the moves in HK stocks this week that the current thinking is as follows:
1 - US cuts rates, aggressively in the next 6-9 months.
2 - HK inflation is going up, rather than down.
3 - HK will see negative real interest rates a la 1992-97.
Conclusion: buy asset heavy companies, especially real estate. Note the move in SHKP in the past 2 days and Wharf was up 7% today.
Right or wrong, it seems to be what the market is thinking/betting.
My boss agrees with the Pureheart guy to a certain extent. The US problem is a red herring of sorts. Big problems will emanate from China.
Note that the property auction in Guangzhou included 3 plots of land that total over 7.5 million sq. ft of GFA. Price paid for the raw land was approximately US$100 psf of GFA. Add in construction costs, interest costs, and profit margins and they have to sell the property at prices north of US$200 psf to make a decent return. You can buy most properties in the middle of the US for that level or cheaper, but the avg. income in the US is probably US$35,000 per household, not US$5,000 per household. Either tiny flats or the buyers are betting on huge inflation going forward of some sort. Needless to say, we bid early and were left well behind by the time the bidding stopped.
While we don't know the timing, I suspect that China will get very ugly at some point. Is it next week, next month, next year, or three years from now? All I know is that it will keep going up until it doesn't, most likely collapsing on its own weight. And I'm willing to bet that the loan books of the banks are no better today than they were 5 years ago.
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