HK analysts see deepening gloom

02-Jun-2012 Intellasia | Market Watch | 7:01 AM Print This Post

Hong Kong – listed stocks are likely to face more weakness in the months ahead as a stronger US dollar augurs fund outflows, according to analyst research.

Broker research Thursday reflected the gloomy tone as the city’s Hang Seng Index HK:HSI +0.27 percent was poised for its worst May performance in 14 years, when a financial crisis ended a long period of rapid economic growth in the region.

Daiwa Capital Markets said Thursday that Hong Kong stocks were likely to come under additional pressure, highlighting a resurgent US dollar and weaker global economy.

Daiwa said the prospect of funds outflows from Hong Kong was on the rise as the weak-dollar environment appeared to have given way to a new period of strength in the US currency. The dollar index DXY +0.27 percent is up nearly 5.4 percent in May.

“The latest dollar bounce validates our view that Hong Kong remains vulnerable to massive global carry-trade unwind,” Daiwa said in a note to investors Thursday.

‘Japan deflation scenario’

Piper Jaffray analyst Andrew Sullivan in Hong Kong said surging global bond prices and weakening regional equity markets had raised the prospect that a “Japan deflation scenario” could unfold as global policy makers appear caught in a policy stasis.

Big initiatives by China were unlikely until more was known about the fate of Greece’s membership in the euro zone, while a senior leadership transition due later this year also reduced the chances of aggressive policy moves, he said.

“Short-term fine-tuning is the best we can expect,” Sullivan said, referring to policy initiatives out of Beijing.

Daiwa said its already below-consensus forecast for Hong Kong growth this year may have to be cut further to account for the darkening global backdrop and what it said were diminished prospects of further rounds of quantitative easing in the US

Hang Seng performance

In Thursday’s session, the final day of trade for May, the Hang Seng Index ended down 0.3 percent at 18,629.52, having pared a sharper early decline.

Thursday’s drop brings the Hang Seng to a loss of 11.7 percent for the month, its worst monthly performance since last September and its poorest performance in May since 1998, according to Dow Jones market data. The index shed 14 percent in both of those instances.

Thursday also saw the Hang Seng at its intraday low erase all its gains for 2012. That capped a volatile five-month period that had seen the index up 18 percent in an advance that peaked February 20.

Meanwhile, HSBC, in new research Thursday, said China, Singapore and Vietnam face the most elevated financial pressures as defined by its Financial Pressure Index, which takes into account factors such as rising indebtedness and inflation.

HSBC said it compiled the index to measure how regional economies stacked up when it comes to external and internal indicators of economic risk.

Credit Suisse offered a more upbeat tone, saying in research released Thursday that the Chinese government has more resources to overcome a severe downturn than in periods of weakness seen in the late 1980s and 1990s. However, an eventual recovery in China will likely be more muted than during previous rebounds as the government has only limited scope for new stimulus, Credit Suisse said, noting that China had yet to work off excesses in the housing market, as well as overinvestment and other problems arising from excess credit growth.

Unlike in previous downturns, China this time is faced with higher commodity and labour costs.

One reason wages remain firm even as factory activity slows is the aging population, according to Credit Suisse, which described the trend as “the fading of China’s demographic dividend.”

The Swiss bank said the longer-term outlook for China depended on the development of sectors such as high tech, health care and financial services in replacing reliance upon energy, banking and property as drivers of the economy.

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Category: Hong Kong

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