Some analysts view the 8-9 price-earnings multiple offered by the benchmark Hang Seng Index as evidence that stocks are cheap now in Hong Kong.
However, not everyone agrees with this notion.
Among the skeptics is former investment banker and PCCW deputy chairman Francis Yuen Tin-fan.
The two biggest components of the index—real estate and banking sectors — are both facing major uncertainties, Yuen pointed out to Hong Kong Economic Journal Monthly.
It’s true that HSBC is offering 8 percent stock dividend, but the adverse policy environment presents immense challenges, as reflected in the heavy penalties imposed on numerous lenders in recent years, he noted.
Yuen also said that mainland Chinese banks are fetching poor valuations as the market has some real doubts regarding the lenders.
“The big four state-owned Chinese banks trade at a PE multiple of just 4-5 times, because investors have big questions about their future prospects,” he said.
As for property plays, most of the stocks “are valued at fifty percent discounts to their book values, because lot of people feel that the current exorbitant home prices [in Hong Kong] won’t sustain,” said Yuen.
“The government has also shown clear intention to put a cap on property prices. So how can we expect much upside from property shares?”
Mounting risks surrounding the global economic environment also worry Yuen.
Since most countries are not willing to accept short-term pain from an economic downturn, and governments care more about winning votes and staying in power than the long term economic health, printing money, or the so-called quantitative easing, has become the norm since 2008.
“Cost of money is almost zero, prompting more excess production capacity. The problem has never been solved, rather it is getting worse.”
Yuen is predicting a crash in equity prices, and says he would not be investing any serious money for the time being.
He also prefers to keep the investment horizon short because a “black swan” event could suddenly emerge out of nowhere and turn the financial world upside down.
There are only two blue chips that Yuen is comfortable holding for long term—Tencent and AIA.
He believes Internet giant Tencent will be a winner amid rapidly evolving technology. As for AIA, Yuen says he likes the solid growth in new policies, which is key indicator of an insurer’s long-term profitability.
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