Japanese shares led a regional rout yesterday, with the Nikkei 225 stock index extending a selloff, pushing the market into bear territory and threatening to drag stocks across Asia down with it.
Fund managers said equity benchmarks in Hong Kong and on the mainland could easily slide more than 10 per cent.
The Nikkei dived 6.35 per cent to finish at 12,445.38 yesterday, erasing almost all its gains since the Bank of Japan unveiled a plan on April 4 to double the size of the country's monetary base.
The Nikkei has now dropped more than 20 per cent from the record high it set on May 22.
"Now investors just want to get out of Asia to buy safer US bonds, [asking] 'Why should I sit on profits and take the risk of assets falling further?'," said Franki Chung, chief investment officer at asset manager MEAG Hong Kong. "Investors are losing confidence in the effectiveness of the money printing in Japan."
Global fund managers have been aggressively reducing their risky assets as 10-year treasury bonds rose in the US, prompting them to sell high-dividend stocks globally in favour of safer government debt. US 10-year yields rose to 2.29 per cent on Tuesday, the highest level in 14 months, on concerns the Federal Reserve is preparing to taper off its asset purchase programme.
Chung described yesterday's sell-off in Japan as "purely a momentum play" that was contagious to the Hong Kong and mainland markets.
The Hang Seng Index lost 2.19 per cent to finish at 20,887.04. The H-share index of mainland stocks listed in the city fell for an 11th trading day, on its longest losing streak in 17 years. The Shanghai Composite Index shed 2.74 per cent to close at 2,148.36.
Francis Cheung, managing director of China-Hong Kong strategy at brokerage CLSA, said the price-to-book-value ratio of the MSCI Hong Kong Index, which tracks the performance of large- and mid-cap stocks in the city, is highly likely to correct by a further 12 per cent to 1.14 times from 1.3 times at present.
"We have a weakening Chinese economy, rising US bond yields and property firms [susceptible] to rising interest rate risks here. Hong Kong markets have a chance to reach the trough seen in October 2011," he said.
The Hang Seng Index fell to 16,250.27 on October 4, 2011.
China's A-share market, less linked to global market moves, may not avoid trouble this time due to poor domestic sentiment. The Shanghai Composite could drop below 2,000 points, said Zhang Gang, an analyst at Central China Securities in Shanghai.
Jiming Ha, chief China investment strategist at Goldman Sachs, said economic growth on the mainland would slow gradually to 4.5 per cent in 2020, with an average growth rate over the next seven years of just 5.7 per cent.
"Unless investors have confidence the bond yield in the US is stabilising, capital is not coming back to Asia," said SooHai Lim, Asian equities director at Barings.
Additional reporting by Phoenix Kwong