21 October 2016
Carmaker BYD is one of the firms that benefited from supportive government policies. Photo: BYD
Carmaker BYD is one of the firms that benefited from supportive government policies. Photo: BYD

Three types of stocks will shine in tough market

Li Ka-shing, Hong Kong’s richest man, described Hong Kong’s economy as the worst in 20 years.

But even in the worst days in the past two decades, there were great stocks that provided super good returns.

Investors have no need to worry too much if they know how to find such best-performing companies.

The worst periods for Hong Kong’s economy in the past two decades were the Asian financial storm in 1997-1998, the years after the dot-com bubble burst, SARS in 2003 and the 2008 global financial crisis.

As a result of the Asian financial storm in 1997, Hong Kong reported negative growth in gross domestic product in the second half of 1998.

The worst was -7.7 percent growth in GDP in the fourth quarter of 1998.

The unemployment rate rose to 6.4 percent in early 1999 from 2.1 percent during the period around the 1997 handover of Hong Kong to China.

Home prices fell 50 percent.

The Hang Seng Index fell to 6,660 from 16,674.

Even in those years, returns from Lenovo Group Ltd. (00992.HK) doubled between the second quarter of 1998 and the third quarter of 1999.

It became the top supplier of personal computers in the Asia-Pacific region in 1998 and one of the blue chips in 2000.

As for the period between the dot-com bubble and SARS, it brought Hongkongers nearly six years of deflation.

The deflation cycle didn’t terminate until July 2004.

The Centa-City Leading Index fell to a bottom of 31.77 in August 2003, compared with its peak of 102.93 in October 1997.

The unemployment rate was 8.5 percent.

The mainland oil companies shone during this period.

PetroChina Co. Ltd. (00857.HK) and Sinopec Ltd. (00386.HK) rose two to three times in these years, benefiting from the climbing international price of oil.

During the 2008-2009 global financial crisis, thanks to quantitative easing by the US Federal Reserve, Hong Kong experienced only four quarters of negative economic growth.

However, the financial asset bubble brought by QE pushed home prices (the CCL index) to a historic high of 146.78 in the middle of last year from a low point of 56.71 during the crisis.

The wealth gap also expanded.

The best-performing stocks during this period were Tencent Holdings Ltd. (00700.HK), Galaxy Entertainment Group Ltd. (00027.HK) and Anhui Conch Cement Co. Ltd. (00914.HK), China National Building Material Co. Ltd. (03323.HK) and BYD Co. Ltd. (01211.HK).

The companies mentioned above fall into three types: first, those driven by strong market demand (Lenovo, Tencent, Galaxy) and that have established some degree of “monopoly”; second, commodity firms in a recovery cycle (Sinopec and PetroChina); and third, firms that receive big advantages from supportive government policies, like those in construction materials, cement, and carmaking.

The same should apply today.

This article appeared in the Hong Kong Economic Journal on April 15.

Translation by Myssie You

[Chinese version 中文版]

– Contact us at [email protected]


HKEJ columnist

EJI Weekly Newsletter