1997, 2008, 2016? Why Hong Kong investors see shades of earlier crises in today’s stock market

PUBLISHED : Friday, 22 January, 2016, 6:39pm
UPDATED : Friday, 22 January, 2016, 6:39pm

Hong Kong is getting mauled in a monster bear market as records have been shattered and billions lost in a rocky fortnight that has investors talking of the financial meltdowns of 2008 and 1997.

The Hang Seng Index fell to a three-and-a-half-year low in the past week, plunging to 18,542.15 on Thursday, the lowest since July 2012.

Still in the first month of the year, the index has already shed about 14 per cent of its value, and no convincing rally is in sight.

The Hang Seng Index surged 2.90 per cent to 19,080.51 on Friday but still lost 2.26 per cent this week, its fourth consecutive weekly loss, after losing 4.56 per cent the week before.

In Shanghai, markets have hovered below 3,000 for more than a week after a savage plunge sent the index back to the level seen in August’s rout.

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The Shanghai Composite Index added 1.25 per cent to close at 2,916.56 on Friday, helping it gain 0.54 per cent this week by Friday, compared to a 8.96 per cent loss the week before, reversing the losing streak of the previous three weeks.

Elsewhere during the week, the United Kingdom’s FTSE index shed almost 3.5 per cent on Wednesday, losing tens of billions of pounds and dropping to a decade low. A number of major markets across the globe saw drops of at least 20 per cent from their 2015 peaks.

The bad news was not just limited to stocks either – the Hong Kong dollar plunged to an eight-and-a-half-year low on Wednesday night, weakening to 7.8294. It strengthened over the course of the week, however.

The Hang Seng’s property index has been particularly hard hit since the beginning of 2016, dropping about 12 per cent by Thursday compared to December, driven by rising interest rates following the weak Hong Kong dollar.

VC Brokerage director Louis Tse Ming-kwong said the current market environment is comparable to the Asian financial crisis in 1997, when the Hong Kong market fell about 14 per cent.

“All these factors are eventually leading the economy to come down, the currency is coming down and not only in China or in Hong Kong, but globally,” he said.

Tse said the market chaos was partially linked to crumbling oil prices, which fell to 12-year lows this week. Friday saw oil prices climbing slightly higher as US West Texas Intermediate crude futures hit US$29.70 per barrel, up 17 cents.

But Ample Capital asset management director Alex Wong said Hong Kong was in a better position than it had been during the 1997 crisis.

“Back then many people were over-leveraged, people owned housing they shouldn’t own because they were involved in the housing market but this time I think not many people are [in the same situation],” he said

However, despite Hong Kong investors’ stronger fundamentals in 2016, Wong said it would be a long, slow recovery from this month’s crash, possibly worse than in 2007.

“Eventually people will discover that this level or even a lower one is justified because it will be harder to earn cash in Hong Kong or in China,” he said. “The Chinese government just couldn’t accept a bubble burst in the A-share market and I don’t think foreigners will be too willing to get into China because of that.”

Tse said that in the short term, he expected the market to take a breather at the current level, both in Hong Kong and in global markets.

“In the near term, they might even have a dead cat bounce, but after that, in about six months’ time, we will see the global economy affected by whatever happens in these couple of months,” he said.

“You saw what happened in July last year – the renminbi went down then, we feel the effect now. What happens now could have profound repercussions in six months.”