22 October 2016
Some market bubbles have opened up investment opportunities but Hong Kong's 1997 property market collapse exacerbated an ongoing crisis. Photo: HKEJ
Some market bubbles have opened up investment opportunities but Hong Kong's 1997 property market collapse exacerbated an ongoing crisis. Photo: HKEJ

Why market bubbles are not always a bad thing

Since the end of the last financial crisis, China has relied on high levels of money supply to underpin economic growth.

The move has benefited Hong Kong’s retail sector, China’s property market and Macau’s gaming companies.

But years of earnings growth have attracted massive capital to these sectors, resulting in the gradual build-up of assets.

The rise and fall of asset bubbles created investment opportunities.

But in the case of the 1997 housing bubble, the resulting collapse in the property market exacerbated an ongoing crisis.

Now, a new challenge is emerging after China announced further cuts in import tariffs on consumer products, potentially hurting Hong Kong’s retail sector as imported goods in the mainland become more competitive.

Heady growth

Industrial and export-related stocks rose tenfold after China acceded to the World Trade Organization in 2001.

However, these stocks quickly faded amid lackluster demand and rising commodity prices.

Until 2013, China’s property market and Macau’s gaming sector, both driven by liquidity, had outperformed the market.

The question is should investors adjust their allocation whenever money supply growth moderates and the investment focus shifts? If so, which sectors should they bet on?

There are at least two obvious market drivers.

One is Shanghai-Hong Kong Stock Connect, mutual recognition of funds and the forthcoming stock link with Shenzhen.

The other is the potential inclusion of A shares in MSCI, which reflects China’s aspirations for its equity market.

However, China has to find a solution to its mounting local government debt and excessive money supply growth.  

This is key to growth in financial intermediary stocks.

The market rally will not only facilitate financing but also boost insurance, brokerage and other financial intermediary stocks.

Both the Hong Kong and mainland stock markets have a huge upside before any massive fundraising, such as initial public offerings and share placements, take place.

It’s quite common for governments to support the equity market with friendly policies and positive comments.

If China keeps doing that, financial intermediaries will continue to grow until they reach a certain valuation or the government decides to change the relevant policies.

Economic restructuring is another key market influencer.

Market favorites

A number of new-economy stocks have become highly sought-after by investors.

Environmental protection, internet technology, healthcare and retail plays are on track for further growth in the next five to 10 years.

They will account for a higher percentage of the broader economy.

The sharp rally in recent weeks has come as a surprise for many investors.

Nevertheless, the Hong Kong market is nowhere near a bubble given a price-to-earnings ratio of 12 times, except for some internet technology and small-cap stocks.

Investors should not rush to take profit until the rally winds down.

This article appeared in the Hong Kong Economic Journal on May 27.

Translation by Julie Zhu

[Chinese version中文版]

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Columnist at the Hong Kong Economic Journal

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