21 September 2019
When the Hong Kong stock and property markets will end their "Goldilocks period" remains unclear. Investors should stay alert and prepare for the winding-up of the trend. Photo: HKEJ
When the Hong Kong stock and property markets will end their "Goldilocks period" remains unclear. Investors should stay alert and prepare for the winding-up of the trend. Photo: HKEJ

Timing is everything for any investment

The Hong Kong market has entered a “Goldilocks period”, as I predicted in April. The Hang Seng Index surged more than 20 percent to a high of 28,588 points in late April, from a low of 23,677 points in mid-March.

Hong Kong Exchanges & Clearing (00388.HK) led the market jump, with its stock price soaring 79 percent from HK$174.1 in mid-March to HK$311.4 in May. Brokerage stocks also gained substantially.

The market has followed the traditional pattern of “deep correction in May and June and strong rebound in July”. The benchmark index tumbled to 25,617 points on June 29, down from a peak of 28,588 points in late April.

The market is likely to continue to experience great volatility from July. Investors should pay more attention to the long-term prospects of different sectors.

The fairy tale tells us that the “bear” will come sooner or later, although the lady has stayed in the bear house and is having a great time. No one knows when the “bear” will return, probably in three, five or even seven months. Therefore, investors should not forget to stop loss during this period. Up to 70 percent of the investors may suffer a loss and leave the market.

HK housing market

Timing is everything. The US dollar decoupled from gold in August 1971, and the US interest rate had surged to 22 percent by 1981, triggering a recession. During that decade, housing price in Hong Kong jumped 10-fold from HK$110 per square feet to HK$1,100 per square feet.

Beijing announced in September 1982 that it would resume the exercise of sovereignty over Hong Kong. China and Britain then signed the Sino-British Joint Declaration, which allowed the Hong Kong government to sell no more than 50 hectares of land each year. The city’s housing market correction came to an end and picked up until July 1997.

Between 1981 and 1984, housing price tumbled 40 percent to HK$600 per square foot. It rose again to HK$1,000 psf until July 1997, when the government pledged to build at least 85,000 flats a year.

As a result of the handover to China coupled with Asia financial crisis, the city’s housing price had plunged by 65 percent to HK$3,600 psf by the second quarter of 2003. The government then unveiled a set of stimulus measures, including halting the sale and construction of home ownership scheme flats, suspending land auctions and cutting public housing supply.

In July 2003, the government launched the “individual visit scheme” and another arrangement that granted mainland investors residency if they bought properties worth over HK$6.5 million.

These measures have lifted up the housing price to a peak of HK$13,500 psf in first half of this year, 35 percent higher than the record level in 1997.

The government’s cooling measures have failed to reverse the market uptrend. Nevertheless, the housing market is expected to go through a deep correction or a sharp rally every 15 years.

Investors should think in terms of trends. They should join the market when the trend forms and leave when the trend ends.

Central banks in Europe, Japan and China have continued to pump liquidity into the market, which has bolstered equity markets in these regions.

It remains unclear how long the Goldilocks period would sustain. Investors should patiently wait for the winding-up of the trend.

This article appeared in the Hong Kong Economic Journal on July 3.

Translation by Julie Zhu

[Chinese version中文版]

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Chief Adviser at the Hong Kong Economic Journal