Reality replaces bullish euphoria
Thousands of new individual investors leapt into the stock market during last year's bull run. A survey of retail investors carried out by the exchange in the third quarter of the year suggested about 14 per cent of the Hong Kong adult population, or 692,000 people, were shareholders. This was up from just 9 per cent in 1994.
A survey of exchange members showed domestic individual investors accounted for 53 per cent of market turnover, up from 34 per cent in 1996.
Many of these new investors were almost certainly novices, and their buying had a big impact on the already overheated stock market. As the Hang Seng Index approached its August peak of 16,673, traditional trading patterns began to change dramatically.
There was a feeling of euphoria over the smooth handover of sovereignty and wild tales of rich asset injections fuelled a craze for shares in Red Chip counters.
Trading in the blue-chip stocks, which usually accounts for about 70 per cent of daily turnover, began to lose ground to other stocks from May, when it fell to about 40 per cent.
By July, trading in Hang Seng Index stocks accounted for just 22 per cent of turnover.
There was an explosion of overall market turnover and demand for shares in Red Chips and other non- Hang Seng index stocks.
Prices began to show irrational movements, 'indicating that there was a high level of speculation driven possibly by rumour, market manipulation or insider trading or all three', according to the Securities and Futures Commission (SFC).
In May, the SFC and the Stock Exchange issued a joint statement expressing concern over the unusual price movements and trading volume in certain shares 'which appeared to bear no relationship to the assets, profitability or prospects of the companies in question'.
The market had been warned that shares might be suspended until the SFC and the stock exchange were satisfied that the market in them was fair and orderly.
Pre-empting enforced suspension, 56 companies requested their shares be suspended and a further 13 were suspended by either the exchange or the SFC.
Many of the explanations given by these companies for the unusual price movements were of a highly- detailed nature and resulted in a lot of market-sensitive material coming into the public domain for the first time.
Undoubtedly, many of last year's new investors would have suffered big losses as the market turned down; the main Red Chip index, for example, fell more than 80 per cent in the 12 months to the end of August this year.
Many were also unlucky enough to have invested through some of the brokerage houses which collapsed, notably C. A. Pacific. Some of these unfortunates have staged demonstrations outside Exchange Square, embarrassing Hong Kong and its financial sector.
The next survey of retail participation is, therefore, likely to show a far lower proportion of individual investors in the market.
The average portfolio value is also likely to be far lower than the $150,000 reported last year. The same applies to the average transaction size of $50,000 and, quite possibly, to the average monthly investor's income of about $22,500.
Last year's survey of exchange members found that domestic investors - both individuals and institutions - accounted for 73 per cent of market turnover, with overseas investors accounting for 22 per cent.