A reassessment looms for city's asset markets

Updated: 2017-03-15 09:30

(HK Edition)

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As the US stock market basked in euphoria despite the prospect of rising interest rates, the Paris-based Organization for Economic Cooperation and Development (OECD) sounded a stern warning that the rising tide of trade protectionism could derail the global economic recovery in unpredictable ways.

In its latest report published last week, the OECD notes that "a roll-back of existing trade openness would be costly". The report says that an increase in trade barriers in the United States and Europe could depress economic growth and cause a loss of jobs in these economies.

An accompanying chart in the report shows that about 10 percent of US jobs are linked to global trade. The ratios in the various major European economies are even higher, ranging from 20 percent in the United Kingdom to almost 30 percent in Germany.

The impact of declining global trade on Hong Kong could be even worse because merchandise exports, consisting mainly of re-exports to and from the mainland, together with trade finance and servicing, account for a large share of the economy. The blow would be particularly hard felt at a time when the fragile economic recovery in 2017 is expected to be driven, at least in part, by a recovery in exports which have been declining in the past few years.

A reassessment looms for city's asset markets

On the investment front, the OECD report has some sobering advice to investors in the US and other major international markets, including Hong Kong, which have been tracking the Wall Street rally closely. The OECD report warns about a "snap-back" in markets as investors become increasingly concerned about the "disconnect" between stock prices and market fundamentals.

"A sharp reassessment by markets of the future path of interest rates could result in substantial and widespread re-pricing of assets" the report says. This warning about the reassessment of asset prices is relevant to US equities as much as it is to Hong Kong properties.

Persistent low interest rates have fueled local demand for homes. This, in turn, has helped drive property prices to levels which fewer and fewer first-time homebuyers can afford. Escalating property prices have become a major source of public discontent. This is at a time when the wages of the majority of working people have remained static.

Although the overall unemployment rate has stayed low, several economic sectors, particularly retail - one of the biggest employers - are facing a prolonged slump. The government has raised its growth projection to between 2 to 3 percent for 2017, up from the 1.9 percent achieved a year before. But a downturn in global trade resulting from the rise of protectionism in developed markets could make it hard for Hong Kong to achieve the targeted growth rate.

The projected interest rate hikes may not be severe enough to seriously dampen demand for local properties. What's more, banks are offering increasingly attractive terms to prospective homebuyers and property investors in the fight for the mortgage lending business.

What worries investors most is the possibility of a massive outflow of overseas capital from Hong Kong to the US to take advantage of the appreciating US dollar. Indeed, the rise of Hong Kong home prices is seen to be underpinned by, among other things, the inflow of regional, particularly Chinese mainland, capital.

The uncertainties could strengthen the impression in the minds of many investors that properties in Hong Kong are overpriced compared with average rental returns. The rental income of a HK$10 million apartment is about 2.4 percent a year on the price.

An investor can do much better holding HSBC stocks with an average dividend yield of about 6 percent on current prices. Future increases in interest rates would make it even less attractive for investors to hold rental properties.

The only reason to invest in Hong Kong property at current prices is the prospect of capital appreciation. When confidence begins to fade, the resulting wave of selling could send the property market into a tailspin. This would inflict severe collateral damage to the stock market where all major listed companies have property-related businesses.

At times like these, the Hong Kong asset market is due for some serious reassessment.

The author is a veteran current affairs commentator.

(HK Edition 03/15/2017 page1)