The last few months have seen the Hang Seng index rise more than 40 per cent. It reached an all time high above 29,000 points last week. The market surge has been driven by a combination of factors, including expectation of a wave of money from the PRC following relaxation of foreign exchange controls to allow mainland investors to buy Hong Kong shares, high levels of investor confidence and negative interest rates.
In valuation terms, the Hang Seng index is now quite expensive, although not ridiculously so. It is certainly a lot more reasonably priced than the markets on the mainland.
The local property market is also experiencing a less dramatic rise. A combination of low levels of supply (especially on Hong Kong Island and in the luxury sector), negative real interest rates, rising rent levels and high confidence levels (at least in part due to the rise in the stock market) are driving the property market.
Holders of bank deposits in Hong Kong have been faced with negative real interest rates for a number of years (hence my long held aversion to holding any more cash than I absolutely have to). With mortgage interest rates having fallen further (one of my latest HIBOR fixings was at 4.55%) and rents rising, property remains an attractive asset class.
Last week's budget announcement of a small tax cut to be introduced in 2008/9 and a waiver of one quarter's rates is also good news.
Now if only the Hong Kong government would actually do something about the pollution.
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