Jake's View

Sentiment rarely counts, but on Hong Kong property market it does

Confidence indices are usually reverse indicators - sell when they're up, buy when they're down - but current sentiment on HK property is right

PUBLISHED : Thursday, 25 October, 2012, 12:00am
UPDATED : Thursday, 25 October, 2012, 5:01am

"Always wonder what sentiment would look like once you filter out movements correlated with stock market performance.."

E-mail from a friend

As should be perfectly apparent from my friend's musings, he suffers from the peculiar malady of having a social conscience greater than his personal ambitions. Who else would want to understand sentiment except as a guide to the movements of the Hang Seng Index?

I'm not sure anyway that the market can really be filtered out. It is an integral part of the picture, not just the colouration.

The sentiment my friend had in mind was specifically the Public Sentiment Index compiled by the public opinion programme of the University of Hong Kong. It seeks "to explain and predict the likelihood of collective behaviour".

This is, of course, a vile objective redolent of totalitarian states and junk food marketeers. Go mess with your own minds, you HKU academics. Mine is off limits.

We shall ignore it for the moment. The university publishes this index on a monthly basis and it shows up on both charts as a red line reading off the left axis. Up is manic, down is depressive, and 100 is normal.

The thing about these sorts of public sentiment and consumer confidence indices is that they are generally good reverse indicators. Buy when they're down, sell when they're up and you mostly outperform the market. Does this one tell us anything worthwhile about the Hang Seng Index? Is it reliable as a way of making some money on the stock market?

Sadly, probably not, although it would have been superb in the big cycle 15 years ago. As the first chart shows, if you had set your parameters as a sell signal the month after the index crossed 120 on the way up and buy signal after crossing 80 on the way down you would have sold in July 1997 at over 16,000 on the index and bought back at the 8,000 level in March, 2003, just in time for the next bull market.

These same parameters, however, would have taken you out of that bull market much too soon in mid-2005 and would only have had you buying back in again at an even higher level last year for a so-what performance since then.

But why look only at the stock market when the property market is easily as good a way of making money for which you don't work? The second chart compares the public sentiment index with the government's property price index and I think the story is more instructive.

The correlation is even tighter for the 10 years up to 2005 and then also begins to fail. Particularly notable are the opposite movements of the two lines over the past four years. Property prices continued to go rocketing up but sentiment turned worse. This is very unusual.

You can come up with your own reasons for it but I think this chart tells you that Hong Kong people do not really believe the present property rally. They were believers right to the top in 1997, but they have their doubts now.

And I think the sentiment is right. This property rally is driven by artificially low interest rates alone, unlike previous property rallies. People know it and rightly mistrust it.