The Hong Kong investment market, historically dominated by the property and financial sectors, may h...
The Hong Kong investment market, historically dominated by the property and financial sectors, may have to find itself a new role in the future, say fund managers.
Traditionally, Hong Kong was always the gateway to mainland China and the rest of Asia. It operates one of the largest ports in the Asian region and has excellent transport and communications links, making it a major transport hub.
However, Hong Kong is no longer the only entry-point to the Chinese market and China itself is starting to compete with Hong Kong.
'Hong Kong will have to reinvent itself,' says Margaret Gadow, manager of Gartmore's Pacific Emerging Markets fund.
'It cannot keep playing on the one string it has ' the Taiwanese do not have to go through Hong Kong to go into China these days.'
Hong Kong will still play an important part in the Asian market, she believes, but it will have to compete in an ever more open environment.
Matthew Dobbs, manager of the Schroder Asia Pacific fund, agrees with this assessment.
He says the region is bound to lose market share. One long-term issue he points to is financial services moving to Shanghai, but in the end he says the Asian market is so big that Hong Kong will still have a role to play.
'The question is now whether that is reflected in the value of the stock market,' Dobbs says.
Two problems Gadow points to in the near term are the pegging of the Hong Kong dollar to the US dollar, which gives the territory no control over its monetary policy, and the tax regime.
Historically, Hong Kong has had a low tax regime underpinned by the government selling land at artificially high prices.
Land sales have slowed, says Gadow, thus depriving the government of revenue. This is not a result of the territory running out of land to sell but rather of the schedules of land developers filling up and delaying further work.
She says: 'This leaves the government with an impossible decision ' to raise taxes, never a popular option, or to lower property prices, which it cannot do because Hong Kong is currently running a fiscal deficit.'
Despite the challenges, both Gadow and Dobbs are optimistic on the outlook for the Hong Kong market as the potential for growth within China is so enormous.
At present, Dobbs is neutral on the region, not because he is pessimistic on Hong Kong but rather because there is plenty of opportunity to be found in the rest of Asia.
Small and mid-cap companies managed and run from Hong Kong, but with manufacturing in China, have become a significant feature of his Hong Kong portfolio, he says, and now comprise around 10% of the total Asia Pacific fund.
Gadow is overweight on the financial and energy sectors. Utilities are also attractive and, in Hong Kong, are growth stocks as mainland China is still rolling out utility services. Another area she favours is retail as consumer spending is just starting to kick in.
Enormous potential for growth in China.
Established service centre and port.
Utilities transformed into growth stocks.
Other Asian markets appear more attractive.
Market position of Hong Kong will be eroded.
Dollar pegging means no monetary control.
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