Hang Seng Index

Global outlook is not all sunny for investors

Equities markets may be reaching multi-year highs but rising debt levels, the warning of ‘new bubbles’ and geopolitical risks should be not ignored

PUBLISHED : Wednesday, 11 October, 2017, 4:17am
UPDATED : Wednesday, 11 October, 2017, 4:22am

Major equities markets around the world are reaching multi-year highs and, even in the midst of such a global bull run, the Hong Kong market has distinguished itself as a top performer. Some analysts are already eyeing the 30,000 mark on the Hang Seng Index by the end of the year. But while individual markets have their own local causes to propel the rise, their synchronised rallies should introduce a note of caution among investors. Just as they rise together, they will fall together. Diversification, a key method to lower investment risks, has become increasingly difficult.

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Equities in Hong Kong and the mainland are boosted not only by buoyant moods on Wall Street but also a plan by the People’s Bank of China to allow state banks to reduce their reserves and lend more to small businesses. US equities have had a banner performance not seen since 1997.

Many investors and analysts are upbeat about the 19th Communist Party Congress in Beijing next week. The twice-a-decade political gathering is expected to confirm President Xi Jinping for his second five-year term as party chief and is likely to introduce a host of investment and business-friendly policies, as well as reforms of state enterprises. If expectations are met, the bull run will have further to go. Already, the CSI 300 Index is reaching a 21-month high.

Well, the 10th anniversary of the global financial crisis is approaching, and many are partying like it’s 2006. Perhaps people should listen to a Cassandra such as Wolfgang Schaeuble every now and then. In his parting shot as Germany’s finance minister, he warned of spiralling global debt and liquidity as a great risk to the world economy while “new bubbles” have formed as a result of the trillions of dollars central banks pumped into key markets.

Even the unwinding itself, as the US Federal Reserve has started to offload massive assets on its balance sheet, presents its own risks. Another danger is the ongoing efforts of the Donald Trump administration to roll back the regulations imposed in the past decade to prevent another 2008 Wall Street meltdown.

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In China, while state policy directives remain crucial, investors are rightly paying more attention to the state of the economy as it matures. Debt levels are still high and pose a risk to the overall economy. It remains to be seen how well mainland authorities manage slower growth to accommodate more moderate credit expansion to reduce systemic risk. Comparable, if different, kinds of risk present themselves in major economies such as Japan, the euro zone and the US, not counting those of a geopolitical variety. Investors shouldn’t just look at indices, but the world around them. It’s not all sunny outside.