The 34-member Hang Seng Index hovering above 17,000 tends to arouse trepidation in investors who equate that figure with an expensive equity market.
In fact, it does not. Of the more than 1,100 companies listed on the HK bourse, there are many that are still valued affordably.
Let me go over several sectors.
Among the local banks and developers, majors such as BOCHK and Henderson Land and many of their second-tier peers can be had for a good price. Despite possible moderation next year, the Hong Kong economy should continue to grow at 4 to 5 per cent, a key driver of demand for properties, loans and other financial services. Peaking of interest rates will also help a lot.
Do not overlook the power of accelerating inflation. It serves to reduce the real cost of capital, and to stimulate demand for property and loans, as well as equity investment to combat falling purchasing power. I believe the consumer price index will grow about 2 per cent this year and probably accelerate to more than 3 per cent next year.
Even mainland banks, which as a sector are valued at a high 2006 P/E of more than 20 times, offer some good deals. Loan growth could slow down next year in order to curb overheated fixed asset investment growth, which will more or less limit profit growth of the listed Chinese banks. Nevertheless, even taking this into account, their 2007 valuations should be low enough to offer more or less some unrealised value, but investors should be very selective. China Merchants and the Bank of Communications are clearly better than their rivals. These counters could under perform in the coming months, but in the long term the good ones should outperform, so take advantage of any correction.
The Hong Kong retail sector probably experienced its worst time in a while last year, when expenses rocketed on rental contract renewal. Many shops signed their leases in 2003, when rental charges were at rock bottom; in 2005, these two-year contracts began to expire and were renewed at much higher rates, eroding profits.