KEY POINTS:
The silver lining of a financial crisis is never easy to find. This time, Asian stocks, including Hong Kong shares, may benefit from the Federal Reserve's attempt to deal with the US sub-prime mortgage debacle.
That is especially so if the Fed lowers official short-term interest rates to
prevent the liquidity squeeze and credit crunch from harming US economic growth.
Hong Kong is a special case in point. Because its dollar is pegged to the US currency, the Asian city's monetary policy mirrors its American counterpart. That means whatever steps the Fed takes to stimulate the economy will be an unintended fillip to Hong Kong.
There, however, the similarities end. While US growth has slowed to a 1.8 per cent year-over-year rate, Hong Kong's gross domestic product is expanding at a 5.6 per cent pace.
The US budget deficit is 3.6 per cent of GDP, and its current-account deficit equals 6.4 per cent. Hong Kong, by contrast, sports a budget surplus of 1 per cent of GDP and a massive current-account surplus equal to 11.4 per cent of GDP.
Hong Kong's economy is prospering from its close ties to China's economy, which expanded an annual 11.9 per cent in the second quarter. And the Hong Kong dollar's rigid peg to the US currency has translated into a 10 per cent depreciation against the Chinese yuan since 2005 and a 5 per cent decline on a trade-weighted basis.
Meanwhile, the combination of a strong financial-services industry, healthy property market, nine-year-low unemployment rate of 4.2 per cent, and growing tourism from mainland China has resulted in a booming consumer sector. Hong Kong's retail sales soared 14 per cent in June from a year earlier.
"The increasing odds of Federal Reserve policy easing in the wake of the mini-meltdown in the US credit markets will add fresh stimulus to Hong Kong's already strong domestic demand, and will be a tremendous boost to its interest-rate sensitive economy and stock market," says Yan Wang, Montreal-based head of China strategy at BCA Research.
Bottom line: A Fed rate cut would be the equivalent of adding a turbo charger to a Ferrari.
Financial services, property and utilities - three interest-rate-sensitive industry groups - account for a hefty 58 per cent of the market value of Hong Kong's benchmark Hang Seng Index. Hong Kong shares are also taking a pounding in the current stock-market decline. The Hang Seng Index fell 7.1 per cent from July 19 through August. 15. The Standard & Poor's 500 Index lost 9.4 per cent in the same period. Both would get a boost from a Fed rate reduction.
The case for other Asian stocks is similar, though the transmission impact of a Fed rate cut is less direct. "The mess in US-originated structured finance represents for the Asian equity asset class, in the longer term, a gigantic buying opportunity," says Christopher Wood, Hong Kong-based chief global market strategist at CLSA Asia-Pacific Markets. "Asia- and emerging-asset markets will be the likely bubble beneficiaries of the coming Fed easing."
"We have been struck by the relative resilience of emerging-equity markets; 2007 is different from the emerging- market crises of 1997 and 1998," said Tim Harris at JPMorgan Private Bank. Developing countries' external finances were sound; they were attracting foreign direct investment; and many Asian and Middle Eastern nations were building sizeable currency reserves, he said.
In April, the International Monetary Fund noted the global demand for Asian electronic goods, the rise in intra-regional trade, the US's declining importance as a destination for most Asian countries' exports - China being a major exception - and receding inflation pressures. "Against this background, the near-term outlook for growth in the region remains very positive," it said.
"Remain long Asian and emerging-market equities and be short everything that makes its money out of securitised finance," Wood says.
If and when the Fed moves, it will be to rescue the US economy. Better hope it isn't too late. Because no matter how attractive Asian stocks look, they won't weather a US recession very well.
-Bloomberg
