Thursday 15 October 2009
No asset price bubble yet, but watch out next year
In other words, we are not looking at a bubble in local asset markets yet. But, with monetary conditions extremely loose and appreciation pressure on Asian currencies including the yuan set to mount over the coming months, we could well be staring at another dangerously destabilising asset price bust around about this time next year.
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No asset price bubble yet, but watch out next year
Tom Holland
15 October 2009
The rally in Hong Kong’s asset markets marches onwards and upwards.
Yesterday, the city claimed a record for silly apartment prices, with Henderson Land Development bragging it had sold a Conduit Road flat for a mind-boggling HK$88,000 per square foot - a price that beat even London at the height of its pre-crash property madness.
And in the equity market, stocks continued to charge higher, with the Hang Seng Index climbing 1.95 per cent to finish at 21,886.48 points. That’s its highest close since August last year and comfortably more than double the low the index dropped to during the depths of the financial crisis just one year ago this month.
Not surprisingly, the headlong speed of the run-up prompted some observers to wonder if Hong Kong’s asset prices are getting dangerously over-inflated.
In his annual policy address, Chief Executive Donald Tsang Yam-kuen fretted about “the possibility of a property bubble” and suggested he might “fine-tune the land supply arrangements”.
Similarly, in the stock market, some investors noted that valuations had now climbed above their cyclical averages and began to question whether the bullish trend was sustainable.
Most, however, had no such doubts. Encouraged that the world economy is rebounding by a sharp month-on-month increase in China’s September exports, and comforted by the United States Federal Reserve’s promise to keep interest rates at rock-bottom levels for “an extended period”, they continued to pump money into the Hong Kong market.
“Don’t fight the Fed,” advised Ajay Kapur, the head of strategy at Mirae Asset Securities, saying plentiful international liquidity would continue to push Asian markets higher with the Hang Seng Index likely to hit 26,000 points by March next year.
Plentiful liquidity on the mainland will also help support Hong Kong asset prices. Last month, mainland banks extended 517 billion yuan (HK$587 billion) in new loans, up 26 per cent from August. That figure bought the total amount of net new loans made in the first nine months of the year to an astonishing 8.67 trillion yuan - equivalent to 29 per cent of last year’s gross domestic product - and added to fears the authorities may be tightening back on credit growth.
As a result, it looks as if the bull run in asset prices could continue for a while yet. Despite Tsang’s hint that he may ease land supply, analysts at Royal Bank of Scotland believe the government lacks the nerve to risk any significant policy changes.
Meanwhile, Brad Jones, an investment strategist at Deutsche Bank, points out that although Asian stock markets are trading above their long-term average valuations on a price-book basis, they remain well below the frothy heights reached at the peak of the last bull market (see the charts).
He believes the next year could turn into a replay of the 12 months between late 2006 and late 2007. Now as then, the Fed is on hold and the US dollar is looking weak. With Asian central banks facing the prospect that they may have to allow their currencies to rise in order to tighten monetary policy, Jones warns that any incipient appreciation could trigger a renewed flood of international funds into Asian asset markets, propelling regional markets sharply higher.
If he is right, the influx could easily drive stock markets up by another 30 per cent or more, pushing them back into the sort of overvalued territory last seen towards the end of 2007.
In other words, we are not looking at a bubble in local asset markets yet. But, with monetary conditions extremely loose and appreciation pressure on Asian currencies including the yuan set to mount over the coming months, we could well be staring at another dangerously destabilising asset price bust around about this time next year.
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