Riding High

September 15, 2007

Equity investors in Hong Kong and China have shrugged off the impacts of financial troubles arising out the U.S. subprime mortgage market, and are seemingly oblivious to the repercussions in Europe, as the prospect of direct investment by mainlanders in Hong Kong’s stock market looms large. The Hang Seng Index reached historical highs in the last few trading days and the market looks set to gather more momentum in the hope of Federal Reserve’s imminent interest rate cut.

The stock market frenzy continued after the turbulence in August. and investors believed that China and hence therefore Hong Kong will be immune from the liquidity squeeze on the other side of the globe. Mainland stock markets have reacted cautiously to interest rate increase by The People’s Bank of China and are already feeling the heat as the central bank steps up its tightening measures. However. Hong Kong investors have largely ignored the impacts. which they think would be more than off set by the influx of direct mainland capital to Hong Kong’s stock market.

The spillover effect from the stock market is obvious. The mass residential market recorded a high volume of transactions last month. Mainland buyers, though still insignificant compared to the army of local buyers. have already uplifted the spirit of developers who have been drumming up their sales campaigns on the heels of a buoyant stock market. Shenzhen’s rocketing property prices also helped boost sales in the north New Territories, as the price differential gap narrows between Hong Kong and Shenzhen. Market sentiments in property and stock markets are riding high on the back of strong economic prospects. Inflation is expected to appear any time on the horizon. Traditional wisdom that property investment is an effective hedge against inflation has fuelled the recent buying spree and is expected to be significant in underpinning the market in the next few years.

In light of the favourable market environment, we believe the property market will continue its buoyancy. The high end market will benefit both in terms of sales volume and price whereas the mass sector may see improvement in volume only.

By K S Koh