This story was originally published in Daniel M. Harrison’s Finance blog at BNET Industries on May 19, 2009.
Hong Kong’s main index the Hang Seng Index entered a “year-to-date” bull market Tuesday morning, propelled by a surge in banking shares.
While most major indexes have technically entered a bull market in recent weeks, the Hang Seng is the only major index in the world which is now in one for 2009. The traditional definition of bull and bear markets in the U.S. is an upswing or downswing of 20% in value, while in Hong Kong it is viewed locally as compared to the index’s 250-day moving average. The Hang Seng has surpassed both of these this year.
The year-to-date metric is especially significant in light of current debate over whether the recent rally in global share prices can be classified as a bull market phase. Because of the extent of selling early in the year and the uncertainty of economic conditions, many investors are watching the 52-week or the year-to-date benchmarks as opposed to the most recent market low.
Tuesday morning, the Hang Seng opened up around 21% higher than its beginning-of-year level. That compares to a rise of just 5 percent for the Japanese Nikkei, a decline of 3.1 percent for the Dow Jones, and a flat performance in London’s FTSE 100 Index. The 250-day benchmark for the Hang Seng is around 17,200 points, while the U.S. 20% benchmark is 17,264 points.
Castor Pang, a strategist for Sun Hung Kai in Hong Kong, attributes the rise in the Hang Seng to the strong performance of Chinese shares, and in particular the banks. Hong Kong shares have experienced an historical record of HK$250 billion ($32.3 billion) of foreign investment inflows since February.
“More than 50 percent of the Hang Seng Index companies are China-related,” says Pang. “Major enterprises related to China have helped the Hang Seng to hit a bull market stage.”
Pang also says that because the Hong Kong dollar is pegged to the greenback, many investors have chosen to store their money in shares of Hong Kong-listed Chinese banks vs. U.S. Treasury Bonds, since there is no currency risk and the bank shares present a higher return.
Bank branches in Hong Kong are considered particularly safe since the Hong Kong Monetary Authority has guaranteed all deposits on the island, says Pang. “And [Chinese] banks haven’t had subprime surprises,” he adds.
Pang says that as a result of the safe-haven buying, Chinese banks are “overbought” at current levels. That’s an increasingly common consensus in Hong Kong, since the island’s GDP shrank for the fourth consecutive quarter in the January to March period, by 7.2 percent year-on-year vs. an expected 5.2 percent.
Despite a recent rally in U.S. banks, the Dow Jones has some way to go before it can compete with the performance of the Hang Seng. Using the year-to-date metric, the Dow Jones would have to rise to around 10,500 points to compete with the Hang Seng. The Nikkei would have to hit 10,620 points, and the FTSE would have to climb to 5320 points.