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SCMP Reporter

Hong Kong stocks have been sliding in recent weeks as investors discount United States interest-rate rises and Wall Street's more earthy valuations of technology counters.

But trouble usually comes in threes and the third negative factor is closer to home, says Sam Lau Hing-sang. Property.

The director of Asian equities at Baring Asset Management believes a lot of the damage to stocks from interest-rate rises is already in the price.

Rather than taking interest rates in isolation, the market has been looking at how much higher rates have to go before Alan Greenspan and the Federal Reserve figure enough of a brake has been put on the runaway US economy. The projections include Tuesday's 50-basis-point rise.

'The current range of forecasts is for 75 basis points to 150 basis points,' said Mr Lau, who manages Barings' Hong Kong and China Fund.

'I think the market is now discounting towards the 150-basis-point level. I think 100 basis points is probably in the price already. But people are trying to discount more than 100 basis points in this cycle.' That is good news for those looking for an upturn in SAR stocks, but Mr Lau said investors should not get too excited just yet.

'I have been holding a negative view on the property market since last year.The market needs to discount these negative factors before it picks up again,' he said.

'Early in the year people had expectations that property prices had bottomed. I think the analysts were looking for property prices to rise by 10 per cent to 15 per cent.

'But what people are now doing is revising down their expectations . . . to go to expectations that property prices will decline by 10 per cent to 15 per cent. It is not in the price yet because no one has come out and said it.' Financial markets tended to overshoot when they were pricing in future expectations and a 15-per-cent decline may prove to be too gloomy, Mr Lau said. He is expecting property prices to recover and to end the year flat after taking a dip. So far prices for flats have fallen by less than 5 per cent but trading has been wafer thin.

'Volume has been drying up, there is no pricing power for primary developers or secondary home owners.

'What the market has been telling me is the current price is not a market-clearing price. Property prices need to fall further to clear up inventory,' said Mr Lau who, not surprisingly, has gone underweight in property in his portfolio. It makes up 12 per cent against the benchmark Hang Seng Index's 15 per cent.

Mr Lau doesn't pin the blame for the sluggish property market on rising interest rates. After all, these days banks are offering mortgages at 200 basis points below the prime rate.

'I'm not too concerned about interest rates on property but what I'm concerned about is purchasing power. Longer-term, income is the determinant of property prices and people's income does not seem to be growing.' On the positive side of the ledger, Hong Kong's economy is gaining from an upswing on the mainland, helped by declining interest rates there and consumers getting used to economic reforms.

'The most important thing is consumption in China, there seems to be some rebound there,' Mr Lau said.

'China is like a big engine, it takes them a few years to cool down their engine, it also takes them a few years to kick [start] their engine.

'At this time last year, the people in China were facing a lot of reforms: housing, health care, education, also their own jobs.

'I am not saying all these have gone but a lot of these uncertainties have been discounted in people's expectations, so you would expect people nowadays to have better information on their future income compared with a year ago. It will be easier for them to come out and spend.' To take advantage Mr Lau has stocks such as clothing chain store Giordano that has a mainland presence.

But on the whole, Barings chooses stocks on their own merit rather than on macro-economic factors.

'This portfolio is basically run on a bottom-up basis. Stock selection drives the portfolio structure,' Mr Lau said.

Barings calls its stock-picking formula GLCMV. That stands for Growth - in earnings it must be sustainable. Liquidity is sought in the balance sheet as well as the stock's trading. Currency exposure is checked as is Management. Lastly, the Valuation must be right.

One of the stocks that passed the GLCMV test with flying colours is Li Ka-shing's heavyweight conglomerate Hutchison Whampoa.

Mr Lau applauded the move back into Britain's cell phone market with the aggressive GBP4.38 billion (about HK$51.18 billion) winning bid for a third-generation mobile phone licence with junior partner Telesystem International Wireless.

'I think mobile phones will give them a long-term growth engine. Near-term growth is quite visible with China recovering, ports recovering and the consumption business recovering,' Mr Lau said.

'Financially it is very healthy, management has been delivering great value in the past year and at the current level the valuation looks very reasonable.' Mr Lau has 9 per cent of his portfolio in Hutchison, but he is still underweight against its 12 per cent Hang Seng Index weighting. 'If I am allowed to go above 10 per cent [in a single counter] then I would be overweight in the stock.' Another favourite is ASM Pacific which makes equipment for semiconductor factories. Mr Lau's average entry price in 1998 was HK$4 to HK$5 - it is now trading at HK$25.

'It has still got two or three years to go in terms of the [semiconductor] cycle. It is cheap relative to semiconductor stocks in the region.' For the three years to May 4, Barings' Hong Kong and China fund ranked ninth out of 26 funds with a gain of 24.12 per cent, according to Lipper Asia. For the year to May 4 it was up 30.16 per cent and ranked 15th out of 30 funds.

In addition to piloting the fund, Mr Lau oversees some regional institutional portfolios, gives country coverage on Hong Kong, the mainland and Singapore, and sector coverage of the region's banks and financial companies.

Graphic: sam21gwz 



Lack of allure