Hong Kong shares return just 33% since handover ten years ago

A British investor who put money into the Hong Kong stock market as the Colony reverted to mainland Chinese control nearly ten years ago would have reaped returns of just 33% - less than top paying UK cash accounts over this period.

As Hong Kong prepares to mark the 10th anniversary of its independence from British control, its citizens do at least have the consolation that their equity market has out-performed the markets of mainland China. Despite a boom in returns in the past four years, someone who invested in the Chinese Republic’s markets on 1 July 1997 would be nursing a 25% loss (based on the performance of the MSCI China index).

It was the former colony’s misfortune to revert to Chinese governance on the eve of the Asian financial crisis. On 2 July 1997 the Thai government, faced with a wave of speculation, devalued the Baht, setting off a financial shock-wave that reached as far as Moscow and New York. Hong Kong shares, along with equity markets across the region, plummeted in value.

Ten years on and only 5 of the nine markets in the Asia Pacific region have seen positive performance over the decade. Korea had the best performance returning 235%, with Singapore in second place (85%) and Hong Kong in third (33%). The other two markets with positive returns were Thailand (12%) and Malaysia (6%). Indonesia, China Taiwan and the Philippines are all still in negative territory.

The former colony’s fixed income market has held up better than its equity market. Government debt has returned 46% while corporate bonds have delivered 48% in Sterling terms.

A decade of changes

Ten years on, it’s not just the famous skyline of Hong Kong that has changed. The equity markets of both the colony and the region have been transformed. In July 1997, financials and property companies dominated the Hang Seng, accounting for 70% of its capitalisation. Today, they still prevail but their dominance is less: diversified financial services groups have declined from 21.5% of the index to just 5%. Industrials and consumer discretionary firms have stepped into the breach.

Hong Kong has also been toppled from its position as the largest equity market in the region. In 1997, shares listed here accounted for more than a fifth of the value of the Asia Pacific ex Japan index. Today the former colony ranks fifth in size and accounts for less than 10% of the index. Way ahead is Australia, thanks in large part to the boom in commodities and resources. The Sydney market weighs in at more than 30% of the index, followed by Korea (16%) and mainland China (12%).

Allan Liu, manager of Fidelity South East Asia Fund comments: “The make up of Asian markets has changed considerably over the last decade. The number of new listings in the past couple of years means that the options available to investors have expanded many times over. Similarly, increased foreign and domestic fund interest has improved liquidity in the markets.”

Much of the growth in Asia prior to the crisis was led by exports. In recent years, however, domestic consumption has been a key driver of the region’s economic growth, thanks to a fall in unemployment rates and a surge in salary levels. This has made regional economies less vulnerable to a global downturn.

The GDP growth in developing Asia, which had dipped to 4.3% in 1998, has since recovered and had more than doubled to 9.4% by 2006. The region’s share in the world’s GDP has also risen from 6.6% in 1998 and is expected to pass 10% this year.

“Today, Asia once again boasts of one of the best growth rates in the world.” continues Mr. Liu. “This time however, most countries have enormous amounts of foreign exchange reserves which would protect the value of their currencies should they be faced with sudden capital outflows or other crisis in the future.”

By March this year, the foreign currency reserves of major east and south Asian countries had reached $2143 billion, up from $420 billion at the end of June 1997 – a five-fold increase. China’s reserves alone reached $1202 billion, compared with $121 billion over the same period.

“Financial systems in the region have also strengthened.” concludes Mr. Liu. “The monetary authorities of most countries have been acting proactively to control sharp rises in prices, excess money supply, speculative activity and to increase transparency. Companies too have improved their operating efficiencies, which in turn has led to a significant improvement in overall competitiveness, and a substantial reduction in debt levels. This contrasts greatly with companies back in 1997 that were laden with debt. Generally, the region has emerged stronger from the crisis of a decade ago and while we may experience some short term corrections in the markets, the long term picture for the region remains positive.”