Hong Kong stocks fell below the value of their net assets for the first time since 1998 as concerns over capital outflows and China’s economic slowdown deepened a bear market.
The Hang Seng Index slumped 1.4 percent at 3:14pm, sending its price-to-book ratio below one. The last time the gauge traded below that level, the Asian financial crisis was roiling the region’s markets and bursting a property bubble in the territory. The Hong Kong dollar traded near its lowest level since August 2007.
Money is flowing out of Hong Kong, one of the world’s most open economies, as China’s growth slows to the weakest pace since 1990 and speculators bet on an end to the city’s currency peg to the US dollar. The capital outflows are pushing up benchmark interest rates, heightening concern that higher financing costs will weigh on the territory’s banking and real-estate industries.
“It’s terrible,” Partners Capital International (博大資本國際) chief executive Ronald Wan (溫天納) said in Hong Kong. “There’s panic selling as short sellers targeting the Hong Kong dollar raised concerns over capital outflows. The Hong Kong market is clearly in oversold territory, but we may see a 10 to 15 percent loss from here under a worst-case scenario.”
The 50-member gauge has already plunged 15 percent this year, while Hong Kong dollar forwards sank to their weakest level this century on Wednesday and interbank loan rates jumped the most in seven years.
Centaline Property Agency Ltd’s gauge of secondary home prices has slumped almost 9 percent from its record in September last year.
Analysts expect earnings per share for the Hang Seng Index to drop 11 percent in the next 12 months, data compiled by Bloomberg show.
The Hang Seng’s slump below book value puts it in the same league as some of the most beaten-down markets in the world. They include Brazil, where the worst recession in decades has sent the benchmark index to 0.9 times net assets, and Egypt, which has a multiple of 0.8. The Standard & Poor’s 500 Index trades at 2.5, while China’s Shanghai Composite Index is valued at 1.7 times net assets.
Hong Kong’s market might be coming under selling pressure as investment banks unload futures they have used to hedge issuance of structured products, according to William Chan, the head of Asia Pacific equity derivatives research at Bank of America Corp’s Merrill Lynch unit in Hong Kong.
He said banks have purchased futures on the Hang Seng China Enterprises Index, a gauge that shares many constituents with the Hang Seng Index, and will unwind those positions when the China measure falls below the 8,000 level. It dropped 2 percent to 7,861.92 yesterday.
“Markets are concerned about capital outflows from Hong Kong should the currency move to the upper end of the peg band,” said Binay Chandgothia, a portfolio manager at Principal Global Investors in Hong Kong. “Given the magnitude of the fall over such a short span of time this year, markets can react positively equally fast should a positive trigger emerge.”
Right now, there are few places for investors to hide in Hong Kong’s market. The proportion of Hang Seng Index members hitting new 52-week lows rose to 64 percent on Wednesday, the highest since October 2008.
While Hong Kong’s links to China have fueled the selloff this year, the head of the territory’s bourse operator reiterated his view that Hong Kong’s role as a gateway to China will pay off in the longer term.
“Our vision is focused on connecting mainland China with the world,” Hong Kong Exchanges & Clearing Ltd (HKEx) chief executive officer Charles Li (李小加) said.
HKEx shares dropped 3.3 percent, extending their decline this month to 18 percent.
The Hong Kong dollar yesterday fell 0.02 percent to HK$7.8189 against the greenback.
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