Effects of lingering deflation weigh heavy on stock exchanges
Hong Kong's asset deflation story may be old, old news but it is certainly not going away.
Yesterday, figures were released marking the 50th consecutive month of consumer price deflation.
The grinding adjustment of Hong Kong's economy to the post-handover, post-property bubble era is still taking its toll on the stock market, making domestic demand growth stories as rare as an impoverished lawyer.
The lingering effects of deflation explain why fund managers are lukewarm on the market at best.
The consumer price index release coincided with Merrill Lynch's latest monthly survey of regional portfolio managers. While Hong Kong had a net positive reading on liked or disliked markets, it was a mere 2 per cent in the black.
While things look weak on the economic front, earnings growth among domestic stocks will be muted. And it is difficult to see any upside surprise to the grinding story of Hong Kong's adjustment while the currency peg remains in place, some commentators argue.
Taking 1990 as benchmark, Hong Kong is still 45 per cent overvalued against the yuan even after 50 months of deflation.
