Hong Kong Monetary Authority

Hong Kong stocks, real estate in danger as Fed policy tightening looms, analysts say

An exodus of capital could be damaging for Hong Kong asset prices after an inflation of historic proportions since 2008

PUBLISHED : Monday, 14 December, 2015, 5:04pm
UPDATED : Monday, 14 December, 2015, 5:11pm

Analysts warn of hot money outflows from Hong Kong that could negatively affect the equity and property markets if the US Federal Reserve initiates its first rate-tightening cycle in nearly nine years this week.

Since the US adopted it aggressive monetary easing policy in 2008, about US$110 billion worth of funds has flowed into the local equity and property markets, according to the Hong Kong Monetary Authority.

Those funds, however, could head for the exit if US interest rates begin to ratchet higher on a path towards policy normalisation, experts say.

Norman Chan Tak-lam, chief executive of the HKMA cautioned in September that higher US rates “may lead to some capital outflow.”

Higher rates would bring about an end to the low interest rate environment, a mirror image of the conditions that brought waves of capital to Hong Kong shores in recent years.

Joe Tong Tang, executive director of Sun Hung Kai Financial, said the outflow of hot money started over the last few months.

“The market has expected that the US would increase the interest rate in the second half of this year, while the mainland economy and stock markets were not performing well. This has led investors to withdraw from the market, which explains why the stock market turnover is so low recently,” Tong said.

The stock market turnover on Thursday stood at only HK$69.50 billion, compared with an average daily turnover of HK$109.9 billion in the first 11 months this year.

Christopher Cheung Wah-fung, a lawmaker for financial services sector who is a broker, shared the view.

“The stock market sentiment is so weak recently as investors are worried the interest rate rise will led to capital outflow. This will continue for some time as the US is likely to continue to increase the interest rate next year,” Cheung said.

Ben Kwong Man-bun, an executive director and head of research in KGI Asia, agreed that there will likely be additional capital outflows in coming quarters.

“If the US increases the interest rate frequently next year, money invested in Asia in the past few years would likely flow back to the US markets,” he said.

Meanwhile, Gary Cheung Wai-kwok, the chief executive of Tung Shing Futures, said the market has already discounted the US rate rise and as a result, he believes the market may bounce back even if the Fed tightens as many analysts expect. “The market sentiment may improve after the rate rise as it clears up uncertainty,” he said.

US interest rates have been frozen since 2006, reflecting the longest pause in its modern history. In an another low-interest rate period during the 1990s, the Fed held the target rate at 3 per cent for 17 months.

Many analyst expects the interest rate will increase by 25 basis points this week, while tightening could take place in larger moves more next year.

Hang Seng Bank executive director Andrew Fung said the rate rise is likely to be more gentle than in previous cycles and he thus believes outflows will also be softer.

“However, the capital outflow can be triggered by other factors too, such as relatively weaker share market,” Fung said.

Brett McGonegal, chief executive of Reorient Group, said the local property market will get hit by the rate rise.

“The Hong Kong real estate market will get hit as the dollar peg and tightening will move up mortgage rates and make property less attractive,” McGonegal said.