Hong Kong: Buy - SAMPLE REPORT
Summary
While profits are at the top of the cycle, margins are protected by increasing productivity and falling unit labour costs. And turnover is protected because China's "trend" growth has to remain strong. So buy back in once the US dust has settled.
The Economic Time™
Monetary Economy:
Inflation bottomed around October 2002 and plateaued in July 2004, thanks to stalled inflation in food, utilities and clothing. Under administration from the Hong Kong Monetary Authority (HKMA), the monetary aggregates are diverging. Reserve money stopped contracting in March 2005 and now is "rising" by 0.6% per year. M1 is contracting less than at its low point this January, what with higher short term rates attracting more demand deposits. M2 growth has accelerated since April 2004 with time deposits rising by some 30% p a. Growth in M3 is steady with more deposits held with deposit taking companies. Lending is decelerating from its more recent peak in July of last year. Within this, loans to trade finance, shipping and manufacturing are decelerating rapidly, while loans to wholesale and retail trade have plateaued, as have loans for property development and investment. Here, lending to the residential and commercial sub sectors is decelerating, but loans to the industrial sector are still rising rapidly. Loans to electricity, gas and telecoms keep rocketing by nearly 50% a year. The Fed started its tightening interest rates in June 2004; Hong Kong's one year bill yields followed up as of December 2004, and its Best Lending Rate rose as of February 2005. The yield curve has flattened five percentage points since then: short rates have risen 37x while long rates have risen by only one third. No changes to Hong Kong's pegged exchange rate, so expect it to follow the US dollar. If Fed Funds climb more than the market perceives, we remain of the view that the dollar will rebound especially against the yen, but also against the Euro, for some time. On a three month monetary policy view, expect the Fed to raise Fed Funds even more - peaking at around 6% by 3Q06.
Real Economy:
Growth is robust despite a growth-neutral policy mix. The HKMA's monetary policy is one of slight loosening; however, fiscal policy is mildly contractionary in that expenditure is contracting mildly, especially in public works such as public housing. GDP remains robust due to strong capital formation and solid private consumption as well as exports. On a three month macro profits view, growth peaked this December in properties, finance as well as in commerce & industry: ever higher Fed Funds will drive up local rates. These have to slow down housing activity and thus domestic demand. Of course, China's strong "trend" growth is the countervailing force, ensuring Hong Kong's long term prosperity. Another "plus" is that productivity is rising by nearly seven percent while wages are rising by three percent, so unit labour costs are falling by around four percent. Thus, even if turnover slows down somewhat, margins should remain wide.
Sectors
Strong Buy Sectors
- Textiles, Clothing & Footwear
Buy Sectors
- Energy
- Electrical Components
- Banking
Strong Sell Sectors
- Services
- Oil & Coal Products
Sell Sectors
Hold Sectors
- Technology
- Services
- Real Estate
- Other Financing Business
- Machinery & Equipment
- Household Goods
- Commerce
