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

PUBLISHED : Wednesday, 27 July, 2005, 12:00am
UPDATED : Wednesday, 27 July, 2005, 12:00am
 

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.


Even better, there is no sign that the inflows are slowing. If anything, they are accelerating.


Throughout the last six months, inflows into Hong Kong have been persistently high, at above 90 per cent of the maximum rate recorded over the last 10 years. In the last month, however, they have picked up even more, hitting 98 per cent of the historical high last week.


There is stronger momentum even than seen in the second half of 2003, when surging inward investment helped push the Hang Seng up by more than 50 per cent.


What's more, according to Steven Chang, vice-president at State Street in Hong Kong, the current strength of the momentum of inbound investment means that funds are likely to continue flowing into Hong Kong over the medium term.


This means that the stock market has further to climb.


'Fund flows drive prices, not the other way round,' says Mr Chang, 'and looking at the persistence of these flows, stock prices are definitely heading higher.'


If Mr Chang is right, then some of the more extravagant predictions that we have heard over the past few weeks regarding the Hang Seng's level at the end of the year - Macquarie last week forecast another 20 per cent rally to 17,550, for example - may not be too wide of the mark.


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