25 October 2016
A proposed merger between Cheung Kong Infrastructure Holdings and Power Assets Holdings has been rejected by shareholders. Photo: HKEJ
A proposed merger between Cheung Kong Infrastructure Holdings and Power Assets Holdings has been rejected by shareholders. Photo: HKEJ

QE distorts asset values, making investors short-sighted

Shareholders have rejected a proposed merger between Cheung Kong Infrastructure Holdings Ltd. (01038.HK) and Power Assets Holdings Ltd. (00006.HK).

After the two companies announced the plan, prices of their shares rose by about 4 to 7 percent.

The situation is similar to other recent mega deals like the Pfizer Inc. buying Botox maker Allergan Plc in a deal worth US$160 billion, and Marriott’s US$12.2 billion takeover of Starwood Hotels.

If the proposed mergers took place several years ago, I assume there would be at least a two-digit rise and the market would be really excited. But the current market response is something like: “I don’t give a hoot.”

Why? It’s one of the effects of quantitative easing.

Since the global financial crisis in 2008, major central banks, including the US Federal Reserve and the European Central Bank, launched various monetary easing measures that released an unprecedented amount of liquidity.

Seven years later, the amount of funds flooding the world is unimaginable.

During the seven years, interest rates of major currencies were at historical lows and resulted in some unusual phenomena.

For example, some European countries in debt crisis are offering two-year treasury yield lower than that of similar US treasury bonds. The two-year treasury bond yields in Germany and Sweden are at negative 0.4 percent.

In mainland China, a five-year note issued by developer Vanke is lower than that offered by the Chinese finance ministry.

In short, asset values have been severely distorted by loose monetary policy.

Prices of all asset classes are soaring far beyond their real value. The gap between asset prices and the reality is widening.

Where should the smart money go?

In the past years, funds have been rushing into financial assets like equities and bonds as well as real estate.

However, only a little capital went into the real economy or business operations.

Banks’ commercial lending recorded no growth. Companies are continually borrowing to refinance their old debts.

Those with ample capital can only make merger and acquisition deals to create business growth.

The QE measures have made investors more short-sighted. They live only in the present. Asset price bubbles are thus created.

This article appeared in the Hong Kong Economic Journal on Nov. 26.

Translation by Myssie You

[Chinese version中文版]

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head of private banking and trust services at Hang Seng Bank

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