STOCKS took another pounding yesterday, crashing to a record low for the year. The Hang Seng Index fell on the back of losses on Wall Street but regained some of its ground in a late afternoon rally. The index closed yesterday at 8,221.57, a drop of 209.23 points. Against the better hopes of many seasoned investors, the market fell far further than expected. Other regional markets were not as badly affected, with most falling around one per cent compared to a fall 21/2 times larger in Hong Kong. It has emerged that mutual funds are the big sellers, and have used the futures to stage a quick exit from the market. Huge redemptions from unit holders in the United States are believed to be behind most of the pressure. Asian mutual funds have been among the worst performing sector of the industry this year and investors have grown tired of waiting for a turnaround. Instead they are cutting their losses and fleeing to the safer havens of cash and bonds which are now offering good, risk free returns. Salomon Brothers has concluded that US investors supplied 91 per cent, or US$2.4 billion of the net cash inflow into Asia (non-Japan) mutual funds over the first three quarters of this year. That flow is now reversing itself, and Hong Kong is bearing the brunt of the selling. No one doubts the fundamental value of the market at 8,200 where stocks like Cheung Kong can be picked up for as little as six times prospective earnings. But traditional investors are facing a tidal wave of money rushing out of the market and it is this liquidity flow that is drowning the market. Yesterday there were signs of some value investors sniffing around the market but they certainly were not eager to push prices up. James Osborne of Baring Securities advises value investors to forget sentiment and buy at these levels, but he does not preclude further falls. 'The ratings are fine but sentiment is shot to pieces.' With little confidence in the local market at this stage it is dangling by a thread to New York and Wall Street. If the market has another bad day then brokers here do not rule out a test of the 7,000 level. Next week will be the critical time for the market especially in the run-up to the middle of the month when some are predicting a further rise in interest rates. One possible clue to direction comes from sentiment in Hong Kong, which has definitely started to improve. A few days ago it was impossible to find anyone who saw any hope for stocks, but there are now a few who feel the bottom has come. The question is whether there will be any big buyers. Said one British options trader at a US house: 'Everyone knows there is value in this market, it is just a question of whether it will go lower before it goes higher.' Technically the market is looking very oversold. While Wall Street has fallen less than four per cent since the drop off, Hong Kong is down around 14 per cent. This mini crash has panicked a lot of people and buying is very timid. One interesting sign is that a lot of selling in the futures market yesterday was from local institutions while the big overseas brokers were net buyers. Floor traders said that some of the local selling may be long covering, which would mean yesterday's fall was more technical than substantial. CITIC Pacific was the worst performing stocks, falling 5.2 per cent to close at $18. Turnover in the stock was heavy with $168 million traded. HSBC shares fell in line with the market, down two per cent to close $1.75 lower at $83.75.
