Hong Kong's rising tide leaves Superman's companies under water

Do not be too disappointed if Hong Kong stocks slip back today. After the Hang Seng Index climbed to an all time closing high of 18,353.74 yesterday, it would be surprising if dealers and investors did not sell shares to lock in profits ahead of the holiday weekend.

In the longer run, however, the bull trend that has taken the index up a handsome 23.37 per cent so far this year should remain intact.

There are risks, of course. But for the time being, investors are untroubled.

One reason is that Hong Kong's money markets remain awash with liquidity. In theory, Hong Kong's interest rates should march in lock-step with US dollar rates given the tight linkage between the two currencies. But for the past four months, as the growth in deposits has outpaced loan demand, Hong Kong dollar rates have been falling. The three-month Hong Kong dollar interbank rate is now at a 1.27 percentage point discount to the equivalent US dollar rate, indicating just how much spare cash there is in the system. Inevitably, some of that money is finding its way into the stock market in search of higher returns, helping to keep share prices afloat.

Meanwhile, China's rapid economic growth is still international fund managers' favourite investment theme and Hong Kong remains their preferred market for playing it.

Even though institutions have recently cooled to other Asian markets including South Korea, Taiwan and India, Hong Kong continues to attract record fund inflows. Data compiled by State Street, one of the world's largest custodian banks, indicates that overseas investors have poured hundreds of billions of US dollars into the Hong Kong stock market so far this year.

Although that flood of money has lifted the overall index, not all the constituent stocks have benefited equally. Investors' favourites include contract mobile phone maker Foxconn International Holdings, up an impressive 108 per cent so far this year and China Mobile, up 70 per cent. Both are seen as plays on rising consumer demand in China, which is adding mobile phone subscribers at a rate of almost six million a month.

Also performing strongly is Hong Kong Exchanges and Clearing, which has benefited both from listing fees from mainland stock offerings and from income from heavy derivatives trading. Included in the index last month, HKEx shares are up 101 per cent this year.

Select China export plays, banks and property developers have also done well. Supply chain manager Li & Fung, for example, has risen 52 per cent. Bank of East Asia is up by 60 per cent, while Sino Land has gained 44 per cent.

Just as telling are the stocks that have done poorly. Stodgy utilities such as CLP Holdings and Hong Kong and China Gas have underperformed the index while struggling fixed-line telecommunications company PCCW is down 1 per cent.

But the three worst performers of all make an interesting trio. They are Cheung Kong Infrastructure, which has fallen 4.5 per cent, Hutchison Whampoa, down 5.6 per cent and Hongkong Electric Holdings, down 6.1 per cent. All three, of course, are controlled by former investors' darling Li Ka-shing, whose magic touch seems to have deserted him lately.

Superman might be faster than a speeding bullet but he has been left a long way behind by Hong Kong's charging bulls.