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Correction could be on way

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No one likes a party pooper, so casting doubt on the continuation of the bull run in Hong Kong's and other stock markets is unlikely to receive universal acclaim.

Nevertheless, many people with long experience in equities are sceptical of the sustainability of this bonanza at a time when the general economic situation is so dire. Indeed, the downturn in share prices last week might turn out to be an indication that the market is set for a correction sooner than the bulls expected.

What we have seen in the months since September has been a classic case of money looking for the least worst home. The investor consensus focused on the equity markets as the right destination and share prices have risen, not because people believe in the intrinsic strength of the listed companies, but because they are unimpressed by other forms of investment.

Logic suggests that a market rally fuelled largely by sentiment as opposed to fundamentals is inherently unstable. Yet there is no telling how long sentiment can prevail over logic.

In Hong Kong, shares have risen in a more or less continuous manner by around 20 per cent since the beginning of September until last week, when the gains slipped backed to around 13 per cent. And as chart 1 shows, this rise more or less exactly mirrors the ascent of the Dow Jones Industrial Average.

These two markets have traditionally moved in tandem, not least because of the fixed link between the Hong Kong and US dollars. The chart also shows that over a five-year period, the correlation has grown stronger and, as ever, the lead was taken in the United States, with Hong Kong playing rapid catch-up.

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