Economics, not emotion, with HK equities

Asset Class in Focus

The economy, market and sentiment in Hong Kong continues to slide downward, but don’t look for bargain stocks, advises Isaac Poole, chief investment officer at Oreana Financial Services in Hong Kong.

Don’t wait for the data

Why wait until the official GDP data are published in October to point out the obvious? Hong Kong is in recession. Tourist arrivals, port traffic, retail sales, property sales and manufacturing have slumped. The unemployment rate is ticking higher. The most recent GDP reading (for Q2 2019) was the third quarter of negative growth in the past five quarters. Two consecutive quarters of negative GDP growth is a rule of thumb, but if you have lived and worked through a recession you know one when you see it.

Financial markets know it too. IPO listings have crashed this year. Two mega-IPOs have shelved. The Hang Seng Index is more than 11% below its peak.

Uncertainty is unsettling

There is a school of thought that Hong Kong equities now look cheap with current price-to-earnings ratios around 10. I disagree. Domestic and international political uncertainty remains elevated. And Hong Kong economic data will get worse before it gets better. The economic outlook is materially worse than it was at the start of this year. We estimate that Hong Kong equities remain fundamentally overvalued by more than 13%.

Turbulence is not good for timing

Our philosophy is not to try and time the markets. In the near-term, equity markets get pushed around by emotion, sentiment and flows and we cannot guess where they will go with any accuracy.

But right now, the likely returns on offer from Hong Kong equities over the medium-term look poor. They have been poor an average anyway – with annualised returns for the index over the past 10-years at just over 2%. Take away the best 20 trading days, and those returns move to annualised losses of more than 5%.

Prepare, don’t panic

What does this mean for your wealth? How can you maximise the probability you achieve your investment goals during a recession?

Now is not the time to try and pick market bottoms. That is too often driven by emotion and that path can lead to wealth destruction. Now is not the time to concentrate on individual asset classes. Instead, now is the time to:

-Protect your wealth with sensible asset allocation,

-Adopt a truly diversified portfolio with robust risk management, and

-Be crystal clear about your investment objectives and risk tolerance.

For all of us living in recession in Hong Kong, now is the time to prepare.

Isaac Poole is chief investment officer at Oreana Financial Services in Hong Kong. He contributed this commentary to Fund Selector Asia.

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