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Strategies & Market Trends : HONG KONG -- Ignore unavailable to you. Want to Upgrade?

To: Ron Bower who wrote (2273)	9/2/1998 9:38:00 AM
From: tom	Read Replies (2) \| Respond to of 2951

I've just heard that Paul Krugman believes that the HKMA is right to intervene in the stock market to support the peg on the basis that what speculators are doing in HK is basically illegal (or at least would be in the US). Still what does he know? Answer: more than me. Anyway back to my reply.... Surely even if you like HK you don't want to buy stocks now as the government is supporting them at an artificially high levels. If HK rides out this storm then the adjustment period will continue for some time. I agree that retail sales may not be down 15% next year but I think GDP growth will be down a few % and I believe that the economy will remain weak for some time. Whatever happens I believe that you will be able to buy stocks at lower levels in 1-2 years time. People will take time to forget the government's recent actions. A reputation for non-intervention is like virginity - you only lose it once! I think the key to HK stock performance is inflation and interest rates. As the HK market is driven by property price trends it is very geared into the level of real interest rates. Interest rates of 10-15% and no inflation do not provide a good backdrop for asset price inflation. As yields on investment and residential property are so low (even now), prices must fall some way before they become attractive investments on an income basis. Will inflation rise/interest rates fall? Well inflation (I think we would both agree) is going lower and interest rates (maybe I'm on my own) will remain high as hedge funds, institutional investors and locals move money off-shore in response to the perception that HK$ asset prices no longer reflect fundamentals. I think that the HKMA have one last chance to save themselves. They could admit that this intervention was a mistake and then get on with what they do best - ie very little. My worry is that they will continue to pump money into the stock market and will end up devaluing to late having spent all their reserves (cf Thailand). My own view is that is a question of when, not if, the peg goes.