With the Hang Seng Index now up 34 per cent from its October 27 low, and the H-share index of Hong Kong-listed mainland companies up an even more impressive 60 per cent, hopes are riding high that equity markets have passed their bottom for the bear market.
Certainly mutual fund investors appear to think so. According to figures from data service EPFR Global, China equity funds have attracted US$814 million of new investments over the last three weeks, after recording 21/2 months of solid outflows.
But not everyone is so confident. Some market watchers continue to fret that the run-up over the last six weeks may be a suckers' rally, a temporary upward blip in a continuing bear-market slide. They fear that as corporate earnings suffer and defaults rise as the state of the real economy deteriorates, stock prices will once again head south in response to a new bout of pessimism.
To help investors decide who is right, Gary Evans, stock market strategist at HSBC, has come up with a three-part check list to test whether markets have really bottomed out.
First, valuations have to fall to exceptionally low levels.
This has already happened. At the market's October low, Hong Kong-listed stocks were trading at just a fraction above the book value of their assets.