Tuesday, February 9, 2010

The Global Guru: Asian Tigers Revisited, Part 4

Nicholas Vardy's The Global Guru
February 9 , 2010
Vol. 5, No.6

Fellow Investor,

Asian Tigers Revisited, Part 4

Hong Kong: China's Capitalist Success Story

Hong Kong is a paradox. Although it reverted back to Communist China's rule in 1997, Hong Kong has remained the "freest” economy in the world for 15 consecutive years, as ranked by the Index of Economic Freedom. As one of the original Asian Tigers, Hong Kong also is one of the world's great economic success stories. Its GDP per capita not only soared 87-fold between 1961 and 1997, but also by 2010 Hong Kong had successfully transformed itself into one of the world's leading financial centers. Despite the global economic slowdown last year, this city of only seven million attracted over $60 billion in foreign direct investment in 2008 -- more than twice the figure of India, a country with 157 times Hong Kong's population.

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Hong Kong's liberal tax regime, respect for property rights, flexible labor market, and highly motivated workforce have all combined to make this city-state one of the world's most prosperous economies. And as the only member of the original Asian Tigers that can claim to be the West's gateway to mainland China, Hong Kong offers the prospect of a uniquely profitable investment in your portfolio.

Hong Kong: The World's New Financial Center

If Asian Tiger rivals South Korea and Taiwan boast more developed technology sectors, and Singapore is arguably the world's most attractive place to do business, Hong Kong is the only Asian Tiger to claim a role as a global financial center rivaling London and New York.

Hosting the largest initial public offering (IPO) in the world -- China's ICBC bank in 2006 -- marked a watershed in the development of Hong Kong's Stock Exchange. By 2009, Hong Kong had eclipsed the United States by raising $27.2 billion in IPOs -- compared with only $26.5 billion in New York. Up until last year, the United States had dominated global IPOs in all but one year since 1995. London fell even further. Although the British capital was #1 in 2006, it did not even make the top 10 in 2009. And Hong Kong's figure does not even include the high-profile but delayed $2.2-billion IPO from Rusal, the aluminium group controlled by Russian billionaire Oleg Deripaska -- the first Russian group to be admitted to the exchange.

Hong Kong: The Asian Tigers' Leading Stock Market

Hong Kong boasts by far the largest and most developed stock market among the Asian Tigers. But from a U.S. investor’s standpoint, the Hong Kong market benefits from another tailwind. Although it is thousands of miles away from Washington D.C., Hong Kong's stock market is subject to wild "booms and busts" every time the Fed loosens monetary policy.

Here's why. For the last 25 years, the Hong Kong dollar has been worth about $7.80, a level enforced through an interest-rate policy implemented by Hong Kong's currency board. The result? Every time the Fed cuts real interest rates to zero -- as it did in 1992-1993, and again in 2003-2005 -- as the Hong Kong stock market has doubled. With the Fed firmly committed to its zero interest-rate policy, it's likely to do so this time around, as well.
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There are other reasons to be bullish about the Hong Kong market. After the collapse in global stock markets in 2008, Hong Kong stocks hit single-digit, price-to-earnings (P/E) ratios. In the past, every time the market collapsed to such low levels, Hong Kong stocks have gone on to double, and even triple, within a few years. Hong Kong also offers the most direct way for Western stock market investors to profit from the $585-billon Chinese stimulus package. And despite hitting five-month lows in the recent sell-off, like the other Asian Tigers, Hong Kong -- through the iShares MSCI Hong Kong Index (EWH) -- has comfortably outperformed both the U.S. S&P 500 and the mainland China's Shanghai composite over the last 12 months.

The bottom line? For the attention given to mainland China, Hong Kong's rule of law, free press, open markets, transparency, unfettered capital mobility, and a fully convertible currency have given it a distinct advantage over its mainland rival.

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For now, at least, Hong Kong, an original Asian Tiger, has the upper hand.


Nicholas A. Vardy
Editor, The Global Guru

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