Hong Kong stock prices will probably begin their recovery this year, despite the threat of war in Iraq and universal gloom over the outlook for the domestic economy, according to Oscar Leung Kin-fai, senior investment manager with ING Investment Management Asia-Pacific.
'We believe the Hong Kong market is offering an entry point for the long-term investor. The main reason is the relationship between the bond yield and the dividend yield. Now, a 10-year certificate of deposit [CD] is only offering about 4.8 or 5 per cent. A typical blue-chip stock can give you 4 or 5 per cent in dividend yield. So the gap has narrowed to less than 100 basis points.
'Compare this to the figure for 1997 or 2000. At that time, 10-year CDs were offering about 7 per cent and the dividend yield was only about 2 per cent. The gap was 500 basis points. To us, this is a sign that equity prices are already down to a very reasonable level,' Mr Leung said.
One simple explanation for a wide gap between fixed income and stock dividend yields during a bull market is investors demand less of a known reward to hold stocks when they believe there will be capital appreciation. Conversely, dividend yields that look attractive in a bull market do not look so good in a bear market if stock prices are expected to fall in future. In today's volatile stock market, a year's dividend can easily be devoured in one day of falling stock prices.
'In 2000, the equity market was high but people were still bullish about equities because they expected the economy to continue to grow and stocks to appreciate. Now, when we look back, it seems they were mistaken and fixed income would have been a better investment. Now the equity market is not good. There is a lot of uncertainty, but with the Hang Seng Index at about 9,200 points this is a good entry point. There is a high probability the market will be higher than the current level by the end of the year.'
Mr Leung is jointly responsible for investing about US$800 million in funds sourced in Hong Kong. The money is from a variety of non-retail sources: insurance money from sister company ING Life, pension money from corporate Occupational Retirement Scheme Ordinance (Orso) plans and funds belonging to members of the Mandatory Provident Fund (MPF). Most of this big pool of money - about 90 per cent, Mr Leung said - was invested in bonds and cash. Only about US$60 million was invested in stock markets, but this was nothing unusual, as Mr Leung explained: 'The investment mandates in life insurance and Orso funds are very cautious. These funds need to be largely invested in fixed income. And the amounts invested in fixed income are larger than in stock investments. We are long-term investors. We buy and hold in the fixed income and stock markets. Our investment philosophy is medium to long-term. Our investment horizon is about three to five years. We believe share prices are driven by earnings, which are derived from economic growth.'