Friday, March 29, 2024
 
Columnist
Martin Hennecke
Martin Hennecke
Chief economist at The Henley Group mwh@thehenleygroup.com.hk
"China's most recent economic numbers ¡V compared with those of Europe and the United States ¡V remain relatively resilient."

Perils of property boost preference for mainland-linked shares
07/05/2012


China's most recent economic numbers ¡V compared with those of Europe and the United States ¡V remain relatively resilient.

Also, the internationalization of the yuan seems well underway, attested recently by the widening of the currency's daily trading band.

So, when building a diversified investment portfolio, investors can not ignore China. What should they do now? As a first step, local investors should separately analyze the local property and equity markets.

When evaluating the local equity market, one should distinguish further between Hong Kong listed China equities ¡V H-Shares ¡V and Hong Kong equities.

Local property prices are very high, making them the most expensive in the world, when measured in terms of the nominal average property price per square foot.

Also, Hong Kong's median home price stands at HK$3.15 million or 12.60 times median annual household income of HK$249,000 ¡V also the world's highest ¡V2 followed by Vancouver with a multiple of 10.6 times and Sydney with 9.2 times.

It is true that interest rates in Hong Kong are still extremely low.

This has obviously been driving demand and hence flat prices higher in the past. Many investors expect this trend to continue going forwards.

But when interest rates are very low, it also means they can only go up from here.

If history is any guide, mortgage rates could double or triple from today's level, over a relatively short time-period, sharply raising home financing costs. At the same time, Hong Kong's economy may come under increasing pressure, given its reliance on being a regional financial center.

This status will come under pressure due to the euro zone crisis and rising competition from Shanghai, which recently revealed plans to become a global yuan trading center by 2015.

Hong Kong also relies heavily on the trade and logistics sector. This will be challenged by a slowdown in exports and rising competition from lower-cost ports/logistics centers in the mainland.

The local equity market on the other hand, does generally seem to be relatively under-priced, offering a better upside potential from current levels.

But here, investors should target Hong Kong listed mainland companies ¡V H shares ¡V rather than the local Hong Kong companies, as the latter could be affected more negatively by the factors mentioned above.

H shares are in fact now trading near record discounts to long-term price-earnings ratio averages and price to book ratios, both in nominal terms and when compared against China's Asian peers.

The most recent China PMI data indicate that the mainland economy overall is remaining relatively resilient to both the euro zone crisis and the recent government-induced property and bank lending slowdown.

Globally, even if things take another turn for the worse, China would still have ample room for easing bank lending and property restrictions to counter a slowdown. Also, China's strong and rising tax revenues of recent years could fund new stimulus programs if needed.

Finally, with regard to inflation, it should be noted that companies, as long as they have got a competitive edge in the market, can increase the prices they charge for their produced goods and services in line with inflation.

This means that company's income and value can float on inflation.

Accordingly, investors who are overweight on property may consider reducing such exposure in favor of equities or convertible bonds at this point.

But any equity exposure should be un-leveraged, and it should only form a part of a diversified portfolio that should include at least some gold/precious metals for financial crisis protection.

 


Other articles:
Land of the rising debt - 28/07/2014
Hong Kong property - the cheapest in the world? - 12/05/2014
Ukraine-Russia tiff: turning crisis into opportunity - 31/03/2014
Emerging markets mayhem can offer rich pickings - 10/02/2014
Specter of default dogs West as forecasts come true - 18/11/2013
China equities trumpeted for second glance - 21/10/2013
It ain't over till the fat ladies sing - 17/06/2013
Golden time to load up - 04/03/2013
Shale gas unlikely to wipe sheen off Russian shares - 18/02/2013
Games of distraction - 03/12/2012
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