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SCMP Reporter

FOR A town wedded to superstition, the realisation of cavalier Japanese investment funds storming the Hong Kong market is an interesting one indeed.

  Friday's 318-point leap on the Hang Seng Index in a market, supposedly consolidating and establishing resistance levels, came at the end of a week which had been winding itself up for the Japanese entrance.

  The word is, the clever money in Hong Kong knew the Japanese were coming and made a strategic play to hitch a ride.

 Emerging from the fog of a market almost lost in its own myth is a revealing tale of how the Japanese were played.

  Last week, Nomura had announced a US$1 billion Southeast Asian fund, which would carry a 40 per cent Hong Kong weighting, and other securities houses have been gathering huge new retail funds for a foray into Southeast Asia.

  Obviously, the infusion of this and other institutional funds at the right time would have a dramatic impact on market sentiment and share values.

  Perception, and the perception of others perceptions, are, after all, the engine fuel of bull markets as they reach maturation.

  In an undecided market, as was the case at the beginning of the week, the even balance of buyers and sellers could have easily led to an uneventful absorption of the funds.

  From testing levels in and around the 8,850 mark on Monday and Tuesday, the turning point of the week was the takeoff in the futures on Tuesday - the October futures contract being pushed up throughout the week as it reached its expiration.

  With the Japanese waiting on the sidelines, a complex game of arbitraging was going on between the cash and futures markets. A strategic push on the October contract by some US houses had the effect of drawing investors, long in their October contracts, back into key index shares.

  By hitting the futures hard and fast, potential sellers were knocked back into their shells and buyers swept along in a tide of momentum buying.

  On Friday, as the Japanese fund managers watched the market taking off from under their feet and a sentiment of bullishness coalescing around them, they waded in to drive the market up above 9,300 level.

  That they always intended to be there is without doubt, but the manner of their entry casts an interesting light on the workings of advanced financial markets.

  Despite these esoteric power plays, largely unfathomable to all save a few rocket scientist types, the really interesting part of all this is: Why now? and, more importantly, what are their intentions for the Hong Kong market?   After all, Tokyo institutions have more funds under management than London and Zurich put together.

  If the Japanese are bullish on the territory in the way that US funds are right now, the additional weight of money flowing in could be hugely significant for a market with Hong Kong's relatively small capitalisation.

  Bogged down in a dreary home market, which has been going nowhere for months, Japanese fund managers are the latest additions to the growing number of investors queueing up for a piece of the great China story.

  Since the end of the bubble economy in 1990, the deflation of Japanese asset values has left gaping holes in the balance sheets of banks, insurance companies and pension funds.

  Maybe they have all read Barton Biggs' report of a few weeks back, which triggered the most recent large scale entry of US investors into the region. But what is certain is that they are here. No one is sure for how long, but they want a piece of the action.

  The Japanese have long been the largest investors of direct capital into the region, a trend only marginally knocked off course by the recession at home; but the heady days of the late 80s seem a distant memory.

   With the Hang Seng index reaching into unknown territory, analysts are still wondering whether there is fundamental value in this market.

  The premise that, at 13.3 times earnings with strong growth prospects the market still looks good, is gaining ground.

  To add substance to this reckoning, global interest rates are low and steady, and, compared to the other major markets, Hong Kong is valued at an almost absurd multiple of earnings.

  But what of superstition?   The Japanese are, after all, the people who took the prices of impressionist art to the silliest levels ever seen before the bottom fell out of the market. They are also the people who bought up large sections of the United States before real estate prices tumbled. They also went crazy for golf courses just about everywhere, as the prices hit their peak.

  Yes, even the most devoted believer in efficient market theory must have had a heretical thought on Friday afternoon: ''I think we've been here before.'' 



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