HK investors lie low as index comes back to life

A WEEK or so ago, it appeared the stock market was becalmed in the summer doldrums as fund managers, brokers and analysts disappeared on holidays.

The Hang Seng Index reflected the malaise as it hovered between 6,750 to 6,900 on low volume.

It was, therefore, quite puzzling to see the index suddenly come to life this week with a jump of 407.04 points, 5.8 per cent.

The market is now trading at a price-earning multiple of 13.6 and sports a prospective 1994 p/e of 10.1.

Certainly in a market starved for news recently, there were enough interesting developments close to home and abroad to perk up investors.

The week kicked off in the wake of the French franc's tumble, which caused many to speculate about the future of the European Monetary System (EMS).


There was a healthy dose of excitement stimulated by hopes for an airport financing deal and the 560 per cent jump in profits posted by HSBC Holdings subsidiary Midland Bank.

Strong buy recommendations on China Light and Power by US investment houses Salomon Brothers and Merrill Lynch also focused more attention on Hong Kong's blue-chip counters.

Brokers and analysts said most of this week's momentum had been generated by American institutional investors.

While this explanation has often been used to explain market surges, there are indications this time around that it has substance.


The EMS uncertainty, for example, has provided the Hong Kong market with a boost by forcing US fund managers to alter their investment strategies.

Rather than taking advantage of declining interest rates in Europe to purchase equities, many fund managers have taken the safe route and increased their exposure to Asian markets.


It is a decision that they can easily justify, given the fact Hong Kong is one of the world's cheapest major stock markets. Many managers find it difficult to discover many stocks with price-earnings multiples half that of corporate earnings growth.

It is estimated that only seven per cent of American fund managers' portfolios are outside the US.

An increase of only one or two per cent in Asia would drench the market in liquidity.


Brokers said US institutions were now also willing to take a longer-term approach to Hong Kong and, as a result, prepared to stake out positions because the upside potential in a growth market was greater than the downside risk.

Optimism about China's austerity programme under the guidance of well-regarded economic czar Zhu Rongji has buoyed investors, who now believe a soft-landing of the mainland economy is possible.

''I think there's too much at stake for them to get it wrong in terms of hauling the economy in. A bit of belt-tightening will help,'' one broker said.


Another source of good news from China has been the health of senior leader Deng Xiaoping, who was recently reported to be close to death.

The market's recent performance has also been helped by the fact that many fund managers are reclining on beach chairs in Bali rather than sitting in their air-conditioned offices.

This has taken a lot of selling pressure out of the market, allowing prices to climb as investors scramble to pick up stock.

While Midland Bank's results gave HSBC's stock a sharp jolt to a record high of $80, it is a little too early in the corporate reporting season to draw any conclusions or give it any credit for the market's boost.

In fact, a securities firm director said the investment community had done a poor job in interpreting recent results and some brokers might have to come up with good answers to questions from upset clients.

He said comments about the Bank of East Asia's interim results had included no reference to its $1.9 billion placement, the proceeds of which had produced significant interest payments.

What has been interesting about the market's recent performance is the low profile taken by local investors, who are apparently quite content to let their portfolios ride the upward surge.

A quick look at the performances of different sectoral sub-indices shows all of them posting healthy gains except for the miscellaneous index, which includes many of the second-line counters favoured by punters.

Needless to say, the Hong Kong stock exchange is a strange animal, ruled at different times by sentiment and fundamentals.

The trick is to determine what factors are fuelling the market in order to ride the beast best.