Money talks, so forget the forecasts and go with the flow

If you have been considering cashing in your investments in Hong Kong stocks, you may want to think again. One key indicator shows that the market may still have a long way to climb.

Forget hazy pointers like earnings forecasts, theoretical fair values and technical analysis for a moment. Just follow the money.

Over the past six months Hong Kong has seen enormous inflows of funds from institutional asset managers around the world. Those flows have helped to propel the Hang Seng Index's recent run-up. But even though the benchmark index is now trading at four-year highs just shy of the 14,800 level, there is no sign of the inward flood abating. That means the market's upward trend is likely to continue, at least for the time being.

Some of the best figures on fund flows are compiled by State Street, which, as one of the world's largest custodian banks, has a rare, bird's-eye view of exactly where investors' capital is going as it sluices around the globe.

The Boston-based bank boasts some US$9.5 trillion of assets under custody. That's between 12 and 15 per cent of all the tradable securities in the world, which means that what State Street's clients are buying is an excellent indicator of what asset managers everywhere are buying.

Right now State Street's customers are buying assets in Hong Kong, big time. During the year to date, State Street's custody clients have pumped funds into Hong Kong roughly equivalent to 1.5 per cent of the stock market's capitalisation (see chart).

In dollar terms, that equals inflows of roughly $90 billion from State Street's clients alone. If other asset managers have been allocating their funds in similar fashion, then some $600 billion has flooded into Hong Kong since the beginning of the year. It's little wonder the stock market has been rising.