GEM really is a gem

Hong Kong''s GEM market is one of the best markets in Asia, despite the poor performance of some of the companies listed there.

Hong Kong's Growth Enterprise Market (GEM) has quickly acquired the soubriquet "The World's Worst Performing Market". It is the kind of glib simplification that many practitioners of my profession are wont to make. Using cliches saves people - especially journalists - from having to think for themselves.

But the trouble with simplifications such as the one above is that they tend to miss the point entirely. While the GEM market index might indeed be the worst performing index in the world so far this year, the GEM is by no means the worst performing market. I would go so far to say that it is one of the best markets, certainly in Asia, if not the world.

Firstly I would like to deal with the question of the performance of the GEM index. This can easily be explained by the fact that the index was created right at the peak of the market in early march. That it has fallen to about 44% of its value then is an indication that the companies that constitute the index have performed badly, not that the market has performed badly.

The market has performed remarkably well. Stock exchanges have to fulfill certain distinct duties if they are to be good exchanges. They need to provide a clear set of rules so that issuers and investors alike know they are playing the same game. The exchange must be as liquid as possible so trades between buyers and sellers can occur at the tightest spread and in the shortest amount of time. Finally they need to be able to provide a conducive environment for the safe and efficient settlement and clearing of transactions.

On all counts but one GEM has been a success. GEM officials have probably been a bit too eager to hand out waivers to encourage companies to list on the exchange. While this might show some errors of judgment, the waivers cannot be the cause of the constituent stocks plunging so much in value.

The reason the GEM Index has fallen so much has been because GEM has been doing its job properly. It has created a trusted forum for investors to buy and sell shares - it just so happens that more people want to sell the shares than buy them at the moment. That's OK. Markets are meant to go down - it gives them a chance to go back up.

But the real performance of the market needs to be measured using different numbers than just the index figures. So far 41 companies are listed on the exchange - a remarkable achievement in little over seven months. July was the month that saw the GEM index at its lowest point of 433.87, on July 11. Yet 12 new companies managed to sell their stock during the month. Average daily trading volume on GEM rose 113% in July from June to HK$338 million ($44 million). The total trading volume was HK$7.10 billion against HK$3.33 billion in June.

What this shows is that even while the index measuring the performance of the market constituent stocks is in the dumps, the GEM market itself is performing as well as ever. It is liquid, it is trusted and it is providing a valuable service to issuers and investors alike in Hong Kong and throughout Asia. Dismiss this gem at your peril.

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