Hong Kong market closes above pre-tech bubble highs

Fundamentals are more supportive this time around and the current momentum suggests further upside, market watchers say.
It took six-and-a-half years but yesterday (November 1) Hong KongÆs benchmark Hang Seng Index closed above the highs reached during the tech bubble, driven by a strong performance from index heavy-weight HSBC Holdings.

The index rose 0.7% on the day to finish at 18,453.65 points, well above the intraday high of 18,397 set on March 28, 2000. It also extended the all-time intraday high set last Friday by advancing to 18,494.95 an hour before the close. YesterdayÆs gain means the index has risen 24% so far this year, making it the best performer among the regionÆs major markets û ahead of Tokyo, Seoul, Taipei, Singapore and Sydney.

The breakthrough surprised some observers who had expected investors to remain a bit cautious in the wake of Industrial and Commerical Bank of ChinaÆs trading debut last Friday, the expiry of the October index futures contract on the same day and weaker than expected economic data from the US.

However, brokers say the current momentum suggests that more gains are in store, especially if HSBC remains firm. The lender, which accounts for 20% in the HSI, yesterday added HK$1.90 to a new record close of HK$148.70, supported by recommendation upgrades by some investment banks.

Also underpinning the Hong Kong market is the growing expectation that the next move in US interest rates will be downward. A direct consequence of that argument is the weakening of the US dollar, which makes Hong Kong stocks cheaper for investors who use other base currencies such as euro or sterling. HSBC is among the stocks which benefits twice given that it also uses the US dollar as a reporting currency while generating about one-third of its earnings in Europe.

Being in unchartered territory is always going to make some investors nervous, which could well trigger a slight pull-back in the near-term, similarly to that recently seen in other markets. The FinanceAsia 100 index, which tracks the regionÆs 100 most profitable bluechips, hit a record high of 1561.8 last Thursday and has since come back slightly to yesterdayÆs close of 1527.5. This leaves it up 7.6% year-to-date.

ôAll the open interest in the November futures contract has been accumulated above the 18,100 level so the selling pressure below there is not very strong,ö says Linus Yip, a strategist with First Shanghai Securities.

The underlying fundamentals are also completely different compared with last time the index was at these levels. At that time valuations had been driven higher by profit-less growth throughout the IT sector and when the global tech bubble burst in the spring of 2000 there was little to hold the market up.

By comparison, todayÆs Hong Kong market is underpinned by broad-based earnings growth as well as robust economic growth, which together with the belief that interest rates are at their peak should provide support at least for another year-end rally, observers say.

ôSome people may be more cautious because we are at record highs, but this time there is no excuse for a big sell-off,ö Yip says.

The best performing market in the Asia Pacific region this year is Vietnam with a 69% gain. It is followed by Shanghai (+59%), Mumbai (+38%) and Jakarta (+36%).
¬ Haymarket Media Limited. All rights reserved.
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