Index unaffected by talks
THE stock market is once again having to focus on political issues. But, with Sino-British relations apparently heading for another low, there is little to encourage the market.
It has been widely suggested that the Sino-British talks are on the verge of collapse, but whether or not this is a negotiating ploy remains to be seen. The question for the market is whether it matters if the talks do collapse.
From the relatively narrow perspective of the stock market, the answer must be: Not a great deal. If the prospect of China's takeover of Hong Kong posed such a threat to life as we now know it, the Hang Seng Index would not be at its present giddying heights.
The experience of the past year suggests that, when the index drops, this is viewed as a buying opportunity, particularly by US investors who are becoming increasingly interested in the world's biggest emerging market.
So, although the apparent deterioration in the political climate may cast a shadow over the market's near-term prospects, we feel that the downside for the market, as far as politics is concerned, is limited to a few hundred points.
At the same time, the stock market is benefitting from local negative interest rates and the flow of funds that has been generated in the industrialised countries by the combination of expansionary monetary policies together with their respective sluggish economic environments.
But we think another reason to be bullish on the Hong Kong market relates to its P/E (price earnings) ratio relative to other Asian markets.
The market P/E for Hong Kong is now and has traditionally been lower than elsewhere in Asia. This is because of the uncertainty linked to the China factor.
The Hong Kong market is now trading on a P/E of around 15 times while Singapore is on 20 times, Malaysia 25 times, Indonesia 21 times, Philippines 25 times and Thailand 20 times.
The quality of earning from Hong Kong is more secure than a number of markets with higher P/Es and we feel that, as investors become more comfortable with the transfer of sovereignty to China over time, the market's P/E will rise relative to other markets.
So, if we up-rate P/E of 15 times to say 18 times, this would be reflected in a Hang Seng Index level of 9,000 compared with its actual level of 7,418.
We remain bullish on this market; we favour the hotel sector, which will continue to benefit from increasing arrivals over the next few years and the slowdown in the supply of hotel rooms.
Shangri-La Asia is especially attractive, given the promising outlook for hotels in Hong Kong and the mainland.
We also like conglomerates such as Hutchison, which is looking at a recovery in earnings and, for a longer term play, we recommend Citic Pacific.
Howard Winn is senior regional research manager, Sun Hung Kai Research