The Hang Seng index has been a potent force for wealth creation from the moment of its inception in 1969. Since then, it has delivered a CAGR in US$ terms of 11.6% per annum, versus 6.3% for the MSCI DM World (price return in US$; see Exhibit 2). This makes it one of the best long-term equity index investments of all time.
The sources of this sustained outperformance are many.Hong Kong has been a key beneficiary of China's economic growth story, with the Hong Kong economy morphing from a high labour force growth manufacturing centre to a more mature provider of financial, shipping, tourism and consumer/retail services. Leading Hong Kong corporates have successfully used the cash flow from local oligopoly positions in key economic segments to create diversified conglomerates with a particular focus on Asia. A low personal and corporate tax environment, open capital account and reasonably high standards of market regulation and supervision, and corporate governance (notwithstanding some major scandals in the 1970s and 1980s) have helped to develop a shareholder/share ownership culture that is one of the most stable outside of the US.
Hong Kong's asset markets are amongst the largest in the world relative to the size of the economy. Household net worth per capita is also probably amongst the highest globally. Hong Kong residential property value is estimated at 372% of GDP (see Exhibit 3).
Eoin Treacy's view This
is an ambitious target by any measure particularly since the market has been
rangebound for the last couple of years. However, the historical precedent of
medium-term capital flows from property to the stock market and vice versa is
certainly relevant as prospects for the Hong Kong market are assessed.
The Hang Seng's P/E has risen from 8 to 11 over the last six months but is still attractive when compared to most international markets. The H-Share Index of Hong Kong listed Chinese companies P/E has risen from 7.5 in September to its current 9.15. The respective indices yield 3.22% and 3.4%.
In sympathy with the impressive rebound by mainland China indices both the Hang Seng and H-Shares posted upside key day reversals today. Clear downward dynamics would be required to question potential for a further unwinding of short-term oversold conditions. Sustained moves above 25,000 and 14,000 respectively would confirm returns to medium-term demand dominance and add further credence to the bullish view espoused in the above report. .