Stocks in Hong Kong are replacing homes as the asset of choice for global investors seeking higher returns amid an unprecedented stimulus by central banks from the United States to Europe that pushed interest rates to record lows.
The chart of the week tracks the Hang Seng China Enterprises Index against sales of Hong Kong dollars by the city's central bank since June 2008. The H-share index has rallied 25 per cent from a September 5 low, while policymakers have sold at least HK$83 billion since October 19 to meet overseas demand for the local currency, increasing money in the financial system to some HK$232 billion. The lower panel shows Centaline Property Agency's index of residential prices.
The Federal Reserve and the European Central Bank announced debt-purchase plans in September to bolster economic growth. The Hang Seng China gauge trades at a 35 per cent discount to the Standard & Poor's 500 index and has a dividend yield of 3.3 per cent, twice the 1.7 per cent yield for 10-year Treasuries. The Hong Kong Monetary Authority offers to buy dollars to prevent the local currency from strengthening beyond its permitted trading range under a peg to the US counterpart.
"We have seen international money flow back to Hong Kong stocks in expectation of improving liquidity conditions resulting from global stimulus measures," says Mark Konyn, Hong Kong-based CEO of Cathay Conning Asset Management.
Home prices in Hong Kong fell 2.1 per cent from a record in the three weeks to December 2, the biggest drop since January, after the government imposed a 15 per cent tax on non-local and corporate homebuyers. The city, the world's most expensive place to buy an apartment, faces the risk of an "abrupt correction" in property prices after they doubled in four years, the International Monetary Fund said the week before last.
The US Federal Reserve said on December 12 it would add US$45 billion of monthly Treasury purchases to an existing programme to buy US$40 billion in mortgage debt a month. The HKMA will continue defending the peg and has the ability to purchase "unlimited" dollars, according to a statement.