1: HSI has breached 20,000 points for the first time since September
2: A similar
rebound in HSI after the Asian Financial Crisis (rebased at the
market peak before the crisis)
In retrospect, we made a
“Markets have bottomed” call for both Hong Kong
(represented by the Hang Seng Index) and China H-Share (represented by
the Hang Seng Mainland Composite Index) on 13 November 2008. We set our
HSI target level for 2009 at 20,000 points. On the 27th of July 2009,
the HSI closed at 20,251 points, which was the first time for the index
to close above 20,000 points since September 2008. Chart 1 shows the
performance of the HSI index since October 2007.
As the HSI reached our 2009
level of 20,000 points, we expect that investors who followed our call
will now face the dilemma of “to buy or not to
buy”. Although the current investment sentiment is improving
significantly, our estimation for the HSI in 2009 remains at the 20,000
point level. The unchanged target price does not mean that we are
bearish towards the Hong Kong market. We believe that in terms of
valuation, HSI is now trading at a reasonable PE level.
Current Rally: A Result of Excess Liquidity
Investors tend to be either
optimistic or over pessimistic. Not long ago, we have seen a panic
selling in October 2008. A single digit PE is considered as
unattractive for most investors at that moment. Today,
investor’s investment sentiment has certainly been improved
and they are now more willing to invest.
IPositive news of the Hong Kong
market is being reported every day. For example, excess liquidity is
flowing into Hong Kong and giving support to the stock market.
According to the Hong Kong Monetary Authority, they have recently
injected HKD1.938 billion (US250 million) into the money market in New
York trading to stem an appreciating Hong Kong dollar (as excess
liquidity flows into Hong Kong and pushes up the demand of Hong Kong
Dollar) and keep it within its fixed trading band. Hence, the injection
has lifted the aggregate balance, which is the sum of balances on
clearing accounts maintained by banks with the HKMA, to HK$216.031
billion by 30 July.
Excess liquidity is one of the
reasons that drove up the HSI. The higher the HK aggregate balance, the
more the excess liquidity, and more support to the stock market.
However, investor should note that excess liquidity flow is highly
liquid. The strong inflow we saw in July might turn into a huge outflow
in August. As a result, the risk of investing into the stock market by
following the liquidity is relatively higher. Therefore, we suggest
investor go back to the basics, that is, fundamental analysis.
Earnings Expected For 2009 and 2010
In terms of valuation, the
consensus forecast of HSI earnings growth for 2009 and 2010 is 3.9% and
18.5% respectively. Hence, as of 28 July 2009, the estimated PE level
of HSI for 2009 and 2010 is correspondingly at 19.3X and 16.3X.
From our past experience, most
analysts would make the right call when the economy is on a steady
uptrend or downturn. When the economy takes a sudden turn (e.g. after
the subprime crisis in 2008) and earnings become very difficult to
predict, the consensus analysts’ forecasts tend to be less
accurate. Therefore, we believe that the earnings growth for 2009 and
2010 is likely to be underestimated. We expect that in the next 6 to 12
months, positive news will increase and dominate the market. Earnings
forecast will continue to revise upwards and this will ensure the
sustainable recoveries in the stock markets.
Market Recovery Is In Sight
During the Asian Financial
Asian economies were hit hard by global speculators. Many Asian
countries were hurt by currency depreciation, high external debt and
limited international reserve.
The Hong Kong dollar has also
speculative pressure as the Hong Kong dollar is pegged to the US
dollar. Hong Kong Monetary Authority has spent more than US$1 billion
to defend the local currency. At the same time, the Hong Kong stock
market dropped more than 20% within 3 trading days in late October
Sounds dreadfully familiar?
shows a rebased chart of the HSI performance during the Asian Financial
Crisis and the Subprime Crisis. From the chart, we find that the
magnitudes of both corrections are similar, but the market took a
longer time to recover in the subprime crisis this time round.
According to the chart, the
the current market rally is similar to early 1999. We are confident
that the HSI is likely to follow the recovery path as seen in 1999.
Hence, investors are recommended to invest now and hold for at least
one year in order to capture the upside during the stock market
recovery. We do agree that corrections will be seen from time to time,
but in general, the market is gaining its upward momentum. Amidst the
volatility in the coming 6 to 12 months, we believe there will also be
plenty of investment opportunities.