Hang Seng Index

Buoyant consumer confidence should signal it's time to sell market

PUBLISHED : Tuesday, 19 July, 2005, 12:00am
UPDATED : Tuesday, 19 July, 2005, 12:00am

It's in the price if it's in the press.

Jake's Golden Rule of investment

AND IT CERTAINLY was in the press again last week. MasterCard International likes to trumpet the results of its semi-annual survey on consumer confidence and we in Hong Kong came up second best in Asia in the second quarter of this year.

Our score of 85.5 out of a maximum of 100 was exceeded only by Vietnam and over the past 10 years we only once had a higher score. That one was 86.1 for the fourth quarter of 1999.

I have gone through the big failing of this MasterIndex survey before and thus I shall not devote the whole column to it again today. The basic message, however, can do with a reminder now and again.

Look at the chart. The red line, reading of the left axis, shows you the 10-year record of our scores on the consumer confidence index and the blue line, reading off the right axis, shows you the Hang Seng Index over that period.

What we have here is one of those contrary indicators that successful investors have long learned to prize. Consumer confidence is not a leading indicator of good times to come but an accurate coincident indicator of the economic cycle. Sell the market when consumer confidence peaks, buy the market when it troughs and you come out a big winner.

How big a winner? Well, on a rough reckoning, let us say that you put $100 in the Hang Seng Index in July 1995 and then sold your holding and went into cash on each of the three peaks of consumer confidence in this chart. You also bought the market again on each of the three troughs.

Doing this would have yielded you a profit of $308 on your initial $100 investment over the period. Simply holding your investment the whole way through would have given you a profit of only $50.

Of course, you will now ask the obvious question - how can I be sure at any time that a peak is really a peak and that consumer confidence will not rise further over the next six months, or vice versa for a trough?

The answer, unfortunately, is that you cannot be sure. If I knew of a way of being sure of it, you can be equally sure that I would never tell you. When the rare opportunity of serving money on a plate comes to me, I serve myself, not you. Yes, in these matters I am greedy, just like you.

But what you do know is that this consumer confidence index cannot rise to a higher value than 100 and 85.5 is a very good deal of the way there. It suggests that you should set more store by fear than by greed on the greed and fear equation at the moment.

JOSEPH YAM CHI-KWONG, the chief of the Hong Kong Monetary Authority, is proud that Hong Kong will be among the first of the non-Basel committee members to implement Basel II.

Okay, that comes across as gobbledegook. Any first go at talking central banker talk always comes out as gobbledegook.

'Basel' means an agreement between bank supervisory agencies around the world as to how much of their own capital commercial banks should put up for every dollar of other people's money they have at work.

'Basel II' is the latest version of this agreement. It sets out refinements in rating different financial assets by their relative risk and establishes different amounts of capital required for each category. I leave you the enjoyment of the irony that this sort of agreement should bear the name of a Swiss city.

But while Mr Yam is happy to tell us that Hong Kong has always maintained higher than minimum capital requirements, he does not appear happy that we should know how much of their own capital our banks maintain. When the HKMA publishes figures on overall bank capital and reserves, it mixes them up with 'other liabilities'.

The chart sets out for you the ratio of capital, reserves and other liabilities to total assets for our entire financial system over since 1991.

I agree with you that it is unsatisfactory. How much of it is other liabilities? Come on, Joe. If we have such a sound financial system, why can you not let us know how sound it is?