Hong Kong might be doing the unthinkable. Market forces and monetary authorities have voted that interest rates in Hong Kong deserve to be higher, despite the apparent slowdown in China and weak housing market locally.
Meanwhile, interest rates in the USA are on the rise with steady economic growth. Hong Kong’s mandate to follow American rates seems to have played out in an interesting fashion, with two large contradicting economies.
This is indeed an interesting time for Asia-Pac investors. HSBC’s co-head of Asian economic research summarized Hong Kong’s economic situation appropriately…saying a slowdown is “inevitable”, according to a recent interview. Hong Kong’s success was largely driven by expansion in China and low rates in the USA. With both of these drivers reversing, Hong Kong might be subject to additional volatility.
Despite these contradicting themes and apparent risks, Hong Kong stocks have traded well in response to the central bank raising its discount window base rate. Stocks rallied 3% after the Fed’s decision, trimming year-to-date losses to -6%.
In these cases, strategic dispositions and acquisitions of stock can be difficult, due to significant market volatility. In times of economic uncertainty, stock loans can help reduce portfolio swings by providing additional cash. Principal owners who leverage stock loans can remain long while also meeting short term costs or redemptions.
Hang Seng equities have recovered to levels not seen since early December, displaying the value of stock loans and not giving into media induced selling pressure. Holding for the long term is still the best strategy for value investing.
An indicator for future capital market trends could be the recent drop in Hong Kong real estate. Over the last 3 months, real estate prices in the conflicted Special Administrative Region have fallen 6%, according to the Financial Times. The city’s property market is expect to remain under selling pressure as rates move higher.