A new lining for Hong Kong's dark cloud


Hong Kong stocks have been in a slump since March 2000, but fund managers worry that will end

By Alex Frew McMillan

HONG KONG, China (CNN) -- One of Asia's worst stock market laggards is poised to stage a recovery, a rising chorus of observers suggest.

Investment bank ING joined the voices this week.

"Hong Kong's economy has bottomed out and the country is set to experience a consumer-led recovery," the bank wrote.

On April 25, the same house recommended its clients "overweight" Hong Kong. It believes this special administrative region of China is a contrarian play.

"Finding a Hong Kong bull is nearly impossible," chief strategist Markus Rosgen said. "The bearish arguments are so well-known that the risks are more on the upside than the downside."

In fact, Keith Ferguson, Fidelity's chief investment officer in Hong Kong, was among the first to express bullish sentiments about Hong Kong, in late January.

Funds buying direction

He told CNN he expects further earnings upgrades, in the wake of the global recovery and because of continued growth in China. He reaffirmed on Tuesday via spokesman that he regards values as good.


The shimmering buildings of Central, Hong Kong's business district, mask the hard economic truths of recession

So why has the tide turned all of a sudden? Mutual-fund managers and other professional investors "buy direction," riding the latest trends. But why would Hong Kong become hotter than, say, Singapore?

The answer is fear.

The risk is too great that fund managers will be wrong staying out of Hong Kong at this point, Henry Ho, greater China strategist at Morgan Stanley, told CNN.

"Asia has been cheap since late last year, and it has been reweighted," Ho said late Tuesday. "And Hong Kong has not been reweighted like the others, so it has some catching up."

Ho expects the main Hong Kong index, the Hang Seng, to hit 13,000 to 13,500 by August or September.

There is a chance he'll be wrong. But fund managers are too worried they will miss the move if he (and others) aren't. So they buy.

'You never know'

"You never know when it [the market] is going to move," Ho explained. "But when they have made a lot of money staying out of Hong Kong, the risk is they are too low in Hong Kong relative to their benchmark."


Banking and property stocks have been attracting attention

Fund managers are typically measured against their benchmark. So their bonuses, and sometimes their jobs, are literally on that line.

The optimism is strident against years of pessimism (full story). Hong Kong's jobless rate stands at a record high of 7.0 percent. With deflation set in, an increasing number of Hong Kongers seek jobs in mainland China, Asia's fastest growing economy.

The Hang Seng was the worst major index in the world last year, falling 24.5 percent. It is off 36.2 percent from its technology-induced high of 18,301.53 in March 2000.

Some Wall Streeters admit the best opportunities lie outside the United States. That has revitalized interest in small Asian markets and, to a lesser degree, larger ones: Tokyo, Taipei, Hong Kong, Seoul and Singapore.

Bears still come out to play

Hong Kong has a defensive makeup of property and banking plays. The Hang Seng is often a contrary index, and it was again on Tuesday.

It rose 0.51 percent to 11,795.98, meaning it broke stride with Japan, Asia and a broad slump in the United States (full Asian roundup).

On Wednesday morning it was up again, putting on another half a percent to 11,852.

But the mood in the street still tends to be dour in Hong Kong. Competition from mainland cities such as Shanghai doesn't help. Hong Kong's low birth rate spells long-term trouble (full story). Retail sales were down 3.6 percent for March, to HK$15.1 billion ($1.9 billion).

Economist Andy Xie, Ho's colleague at Morgan Stanley, is among the bears.

"Hong Kong's status as China's exclusive window is eroding by the day," he wrote in April. On top of a 1990s property bubble that burst, "this exerts additional deflationary pressure."

Competition from cheaper Chinese labor and property in cities like neighboring Shenzhen all means Hong Kong faces a tough road ahead.

But Xie may be wrong.

"I don't think that the jury is out," Ho said. "Those guys saying Hong Kong will become another Shanghai or become anther Japan, I think there's an 80 percent chance they are wrong."