Optimism abounds

In the space of a few short weeks, we have been bombarded with a tidal wave of optimism:

• GDP forecasts being revised upwards. Hong Kong is now forecasting 4%+ GDP growth for 2010 (depending on whose forecast you are looking at)
• Hong Kong residential property prices are forecast to increase by 10%, 20% or 30% next year on the back of continued tight supply (this is actually debatable), renewed confidence and a continued supply of cheap and plentiful mortgages (ditto)
• stocks will continue to appreciate, although at a slower pace - valuations based on fundamentals like P/B and PE are mid-range
• monetary tightening will not happen until 2010 Q3 - 2011 Q3 (ditto)
• unemployment is expected to start falling in Hong Kong and elsewhere in Asia (or may have already done so) (although still rising elsewhere)
• corporate earnings are rising again (or at least recovering)

Sure, there are plenty of doomsayers out there, but their voices are starting to be drowned out by the optimists. Anecdotally, the air quality in Hong Kong is visibly deteriorating, taxi queues and road congestion have got worse and restaurants are getting full again.

Bubbles? There is a lot of talk about bubbles in the local/PRC stock market and the local property market. While stocks and property have rallied a long way off their lows, by historical standards:

• mass market residential property in Hong Kong is still much more affordable and lower in absolute terms than in the period leading up to the Asian crisis in 1997
• stock valuations based on P/B are close to their long term average of 2x. PE looks more elevated - to the point were value is getting hard to find - but this does not indicate a bubble

While there are calls from the IMF among others to pre-empt a bubble in asset values, I see no need for such action at this point. Valuations are not stretched. The economy is still recovering from the impact of the crisis (relatively limited here compared to the US) and confidence is returning. More to the point, as long as the HK$ is pegged to the US$ and the US refrains from raising interest rates, the Hong Kong Monetary Authority has little choice but to keep the supply of money in Hong Kong at high levels.

All in all, things are looking a lot better than at this time last year.