Stories of HK$1m parking slots mean it's finally time to worry

To be right too early can be as bad as being completely wrong, and knowing when to jump in or out of markets is almost impossible

PUBLISHED : Wednesday, 21 November, 2012, 12:00am
UPDATED : Wednesday, 21 November, 2012, 2:35am

Whenever anyone says that the Hong Kong property market is wildly overvalued and that the bubble is in imminent danger of bursting, I'm always reminded of Tony Dye.

Dye was a fund manager, famed, and later infamous, for his rigorously analytical investment style.

Like Benjamin Graham and Warren Buffett, Dye was a value investor, who focused on buying solid companies when they looked cheap and avoiding markets that appeared overpriced.

This approach led him to make some startlingly successful market calls. At the end of the 1980s, as chief investment officer of Phillips and Drew Fund Management (PDFM), one of Britain's biggest pension fund managers, Dye bailed out of Japan just as everyone else was rushing to buy into the boom.

Instead he bought Hong Kong stocks at cut prices following the June 1989 suppression of the Tiananmen Square protests.

As a result, Dye's clients successfully sidestepped the 60 per cent crash in the Tokyo stock market over the next few years, while riding Hong Kong's 500 per cent appreciation. New accounts poured in.

During the early 1990s, however, Dye became increasingly nervous about the US stock market. As early as April 1992 he was quoted in the British press saying that Wall Street was "looking vulnerable on a tremendously high valuation".

In early 1995, he acted on his fears, cutting his US$60 billion portfolio's exposure to US equities, especially technology stocks, and parking huge sums of money in cash as a defensive measure against the crash he believed was coming.

Over the next 18 months the broad US market rose 37 per cent, with the technology-heavy Nasdaq index climbing 50 per cent.

Dye was undeterred, pointing out that equity valuations were extremely high in historical terms, while dividend yields were lower than at any previous market peak.

PDFM's clients were less impressed, with some pulling their accounts. Dye stuck to his guns, however, saying: "Don't confuse a bull market with brains."

By the end of 1998 PDFM had slid from the top of the performance rankings to the very bottom, and clients were deserting in increasing numbers.

Yet throughout 1999 while the US stock market continued to soar, Dye rubbished ideas that a new paradigm was at work, maintaining that his value-driven approach was correct.

Finally in March 2000, with the US stock market triple the level at which Dye had first made his bearish call, and tech stocks up sixfold, PDFM's Swiss owner UBS lost patience. Dye was elbowed out, and the company announced it was adopting a new investment strategy focused on tech sector growth stocks.

It can have been small consolation, but the US stock bubble burst just days later. Over the next 18 months all Dye's warnings were vindicated as the US market collapsed, with the Nasdaq index losing three-quarters of its value. It has never recovered.

Dye had been right. The US equity market had been overvalued. But no one who heeded his warnings thanked him. They missed out on one of the biggest bull markets in history.

The lesson here is that it doesn't pay to be right at the wrong time. For investors, to be right too early can be as bad as being completely wrong, or even worse.

That's why, for the past three years, as the warnings of an impending crash in Hong Kong's property market have grown increasingly shrill, this column has maintained its view that prices will continue to push higher for the foreseeable future.

Now I wonder. Stories over the past few weeks of frantic speculation driving car park spaces to double the price per square foot of the flats above them carry a strong whiff of late-cycle craziness.

The key factor that has propelled property prices so high - low interest rates - will remain in place for the next few years.

But with analysts warning that housing in Hong Kong is anywhere between 30 and 50 per cent above its long-term trend value, the risk that events will trigger a substantial correction in prices is mounting.

Unfortunately, as the salutary story of Tony Dye reminds us, timing the peak of the market and the subsequent slump is next to impossible.

It is unlikely to be tomorrow, or even during the next few months. But when we read stories about speculators paying HK$1 million each for New Territories parking spaces, we know it's coming.