As markets steam ahead, caution is the watchword
Economies have false dawns; markets have suckers' rallies. Ask any random group of reputable economists or institutional investors whether we are in a bull or bear phase, and you are likely to come out none the wiser. What is indisputable is that 'hot' money has been flooding into the city from the mainland and other parts of the world. The inflows have pushed up the property and stock markets. Suddenly, TV viewers are bombarded with operatic arias again - from advertisements for new property sales. Retail punters are elbowing to use monitors for stock quotes at crowded brokerages. The disconnect between market rallies and the economic outlook has never been more apparent. If there is a time for caution, it is now.
Yesterday, the Hang Seng Index rose 5.26 per cent to hit a seven-month high, pacing a broad regional rally on the back of the US markets, following an unexpected surge in American consumers' confidence. The Monetary Authority has been pumping massive amounts of Hong Kong dollars into the system to keep the peg within a mandated range to the US dollar. That is how we know the sudden liquidity from outside, rather than any domestic economic upturn, is behind the extraordinary market upswings.
The government is projecting some pretty grim estimates, yet the market rallies on. Financial Secretary John Tsang Chun-wah yesterday warned about the spectre of deflation returning to haunt the city again. The last time this happened, we all learned how painful it could be. Gross domestic product is expected to contract between 5.5 per cent and 6.5 per cent for the full year. The government has just rolled out another round of relief measures to the tune of HK$16.8 billion. Granted, the public takes with a grain of salt any estimates by Hong Kong officials, who have trouble projecting accurately even their own budget deficits and surpluses several quarters ahead. It is the state of our economy against market sentiment.
The MSCI Asia Pacific Index has rallied more than 40 per cent from a five-year low on March 9; the MSCI World is not far behind. What is clear is that the extraordinary run since markets worldwide hit their low in early March has caught many bears and shorts - people who bet stocks will go down by borrowing against them - by surprise. Even if they are ultimately proved right, they are being forced to jump back in on the strength of the rallies. The shorts have to cover themselves, while the bears are driven by the pain of missing out. And given the large amount of money that has been hoarded by investors on the mainland, more is moving into Hong Kong as a safe, liquid and prestigious place to park their investments. But the fund inflows can just as quickly go into reverse. People should make sure they have reserved a seat if or when the music stops.