By Brian Cosgrave, managing director at INter-Alliance International The events of 11 September ...
By Brian Cosgrave, managing director at INter-Alliance International
The events of 11 September further deepened the international crisis, undermining the confidence of businesses and investors in Hong Kong. Given the risk of further crises, there are considerable uncertainties attached to the outlook.
The world's economies have become increasingly integrated through trade and investment in recent years. The downside to this globalisation is that the economic slowdown is now self-reinforcing, magnifying the initial fall in demand.
Close attention in Hong Kong will be paid to US consumer confidence, which is expected to decline as on previous occasions of national crisis. Household and corporate spending on big-ticket items are both expected to weaken as heightened uncertainty causes purchasers to postpone investment decisions. The effect on confidence has knocked all Asian markets.
The total US fiscal stimulus in 2002, including tax cuts already enacted, emergency relief and extra tax cuts, plus spending increases now being considered by Congress, could amount to 1.5% of GDP, the biggest one-year fiscal boost since 1975.
In the short term, global markets are likely to remain cautious and will continue to experience volatility. Historically, burst bubbles cannot be re-inflated.
Furthermore, the Japanese government has admitted its economy is experiencing the most dramatic decline in 20 years. This is particularly bad news for the Asian region with the Japanese economy being a key export customer for the Asian countries.
Hong Kong will therefore need domestic demand to lead it out of this downturn.
Hong Kong's economic fundamentals have improved greatly since 1998. The Hong Kong banking system has been re-capitalised. Similarly, companies have learnt the importance of stronger balance sheets. Hong Kong has exceptionally high savings rates and strong government balance sheets. Both may be used to increase domestic consumption.
The increasingly strong ties with its immensely powerful neighbour, China, creates significant potential opportunities for Hong Kong.
The earnings yield, which compares the equity earnings yield against the government bond yield, is currently valuing equities at levels not seen for a decade.
Hong Kong equities are cheap, representing the best relative value in the Asian region.
Stock selection is the key to performance in Hong Kong, with quality management making the difference.
JP Morgan is highlighting the merits of manufacturers Yue Yuen Industrials and Johnson Electric Holdings in Hong Kong and technology stocks Founder Holdings International and Legend Holdings in China.
Many of the highly-regarded Chinese stocks that dominate the region's growth opportunities are quoted on the Hong Kong stock exchange.
Undemanding equity valuations and declining returns on cash deposits make Hong Kong stocks look more attractive, and further corporate restructuring should be positive for the longer-term outlook.
Further corporate restructuring a positive.
Hong Kong equities looking cheap.
Growing ties with neighbouring China.
After effects of 11 September.
Potential influence of US consumer.
Continued problems in Japan.
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