How Low Can the Hang Seng Index Go!
The Hang Seng Index has recently tested lows and the main question on your minds is "How low can it go?" We asked Royce Brennan, managing director of our Hong Kong office, for an assessment when the Index was around 7000.
In many ways, this is of course an unanswerable question; however, it appears that we are finally reaching a turning period. Some anecdotal evidence:
Long term money is being invested
Really smart long-term money is now buying quality assets selectively in the region. Some examples of these acquisitions are in South Korea Procter & Gamble's purchase of Ssangyong Paper, Met Life Insurance Co.'s purchase of Korea Life Insurance, Volvo's purchase of the construction equipment division of Samsung Heavy, and Ford Motor's potential purchase of Kia Motors. In Thailand, another country that currently has too much debt, Ahold of the Netherlands and Tesco of Britain have both recently purchased retail chains.
The press and analysts are maximum bearish
The press and virtually all commentators are becoming excessively bearish and gloomy.
I recently attended a most excellent presentation on the "Asian Crisis" by the investment bank ABN AMRO. The presentation, which was delivered by four of their Asian equity analysts three of whom were Asian and all were aged thirty-something, was very depressing in tone. The fact is none of these analysts have worked through a deep recession and are therefore losing all sense of objectivity and perspective.
The U.S.$/Yen is the current key
The key factor that is currently blamed for driving the markets down is the depreciation of the Japanese yen through US$/Yen 140. While the $/Y rate is important it is not as important as the $/DEM. Many commentators in Asia have completely missed the fact that the dollar is not appreciating against the deutschemark at all. The movement in the $/Y is essentially yen weakness. The US administration, fed-up with bailing out the Japanese has for the time being, decided not to support the yen. The long-term solution to the weakness of the yen is for the Japanese authorities to accelerate the deregulation of the economy.
The yen's depreciation has caused the media to speculate that the Hong Kong dollar peg will be broken and that the Chinese may devalue the Renminbi (RMB). While there is no doubt that the yen's depreciation is making life difficult for China, we remain of the view that Premier Zhu Ronji will not devalue the RMB for at least five years. The difficulties in the region simply underline the need to maintain the RMB.
Hong Kong banks
Turning to Hong Kong. The yen depreciation has placed renewed pressure on the Currency Board and interest rates have risen to around 15% to 20%. In the current environment the local banks main fear is being caught short of funds and their source of funds is limited. Consequently, they are competing for funds from depositors and deposit rates are rising sharply. The Hong Kong Monetary Authority is trying to assist the banks by making more transparent the liquidity flows within the banking system thus helping them to plan their borrowing from day to day.
Hong Kong property
Some 30% of the Hang Seng's earnings are from property and the sector is under severe pressure with rents and property values continuing to fall. Mr. Andrew Lawrence, a property analyst at Dresdner Kleinwort Benson, estimates that prices have fallen 35% to 40% from the 1997 peak while rents have fallen 20% to 30%. Based upon affordability levels he expects a further 5% to 10% price fall. However, lack of funding, unemployment and general lack of confidence could make the market overshoot a further 20%. Obviously the increased supply will continue the downward pressure on prices.
Low daily trading volume on the Hong Kong Exchange
Daily trading volume on the Hong Kong Exchange has collapsed. Recently the volume has been around HK$3-5 billion with a good day being HK$6billion. Over the past few years more normal volumes have been around HK$10billion and in the recent bull market phase HK$15 - 20 billion with exceptional days of HK$25 billion. A collapse of trading volume is also symptomatic of the bottom of a bear market.
Summary
Based on internal earnings estimates for 1998 and 1999, we assume the Hang Seng Index should find support between 6,500 and 7,000 |
