North Korean Nuclear Test a Bliss to Hong Kong Stock Market

October 15, 2006 at 10:55 pm (China, Economics)

An interesting story from Bloomberg:


For Hong Kong, North Korean Nuclear Test May Bring Stock Record

By Darren Boey

Oct. 16 (Bloomberg) — North Korea’s claim to have tested a nuclear weapon may have an unintended consequence: sending Hong Kong’s Hang Seng Index to a record.

Stocks rose for four straight days in Hong Kong, Asia’s second-biggest market, after dropping at the start of last week on the announcement. The Hang Seng is just 1.7 percent below its all-time high, set in March 2000.

Hong Kong stocks have held up better than markets in South Korea and Japan, which are closer to North Korea, as the country has stepped up its nuclear program. The city also has benefited from the end of the Federal Reserve’s interest-rate increases in the U.S., a benchmark for local borrowing costs.

“To the extent that Hong Kong is a less risky place, then people may move money there,” said Tim Leung, who helps oversee $1 billion at IG Investments Ltd., a money manager based in the city. “Investors have been buying Hong Kong on the back of a peaking of interest rates.”

The Hang Seng has beaten the Morgan Stanley Capital International Asia-Pacific Index since Aug. 8, when the U.S. Federal Reserve stopped raising rates after two years. Last week, Hong Kong’s index gained 0.5 percent as the MSCI Asia Pacific index rose 0.1 percent.

Shares of companies with ties to China’s mainland are aiding the rally as a strengthening of the country’s currency, the yuan, lifts returns for dollar-based investors. Industrial & Commercial Bank of China Ltd.’s initial stock sale this month, set to become the world’s biggest ever, may bring further gains.

`More Selective’

A record for the Hang Seng would make Hong Kong the world’s second-biggest stock market where a benchmark index exceeded its 2000 peak. The market is valued at $1.61 trillion, according to data compiled by Bloomberg. In the U.S., the Dow Jones Industrial Average set a new high last week and the Standard & Poor’s 500 Index reached its highest close since 2001.

The Hang Seng rebounded last week from a 1.3 percent decline on Oct. 9, when North Korea announced its detonation of a nuclear bomb, to approach its record close of 18,301.69, reached in March 2000. South Korea’s Kospi index dropped 0.3 percent for the week. Japan’s Nikkei 225 Stock Average added 0.6 percent.

South Korea was united with North Korea before World War II and Japan once ruled the Korean peninsula. The countries joined with China, Russia and the U.S. in discussions with North Korea on its nuclear program that broke down in December. The United Nations Security Council voted 15 to 0 last weekend to adopt a resolution condemning North Korea’s latest action.

“This test is bad for the overall markets,” said Hirokazu Yuihama, a regional strategist in Hong Kong for Daiwa Institute of Research, a unit of Japan’s second-biggest brokerage. “Fund investors will be more selective on where they invest.”

Regional Retreat?

North Korea said it would conduct the test on Oct. 3. The Hang Seng gained 0.1 percent the next day, while the Kospi fell 1.6 percent and the Nikkei dropped 1 percent.

Stocks in Hong Kong also fared best on July 5, when North Korea fired seven rockets over the Sea of Japan, and on July 6, when the government said it would continue missile tests. The Hang Seng rose 0.4 percent in the two days. The Kospi dropped 1.7 percent and the Nikkei fell 0.6 percent.

Hong Kong stocks may slide along with Japanese and South Korean shares if North Korea becomes more aggressive, prompting fund managers to bail out of Asian equities in favor of markets elsewhere, said Michael Nock at Doric Capital Corp.

“There’s a possibility of that happening,” said Nock, who oversees $400 million in Hong Kong. “Why do you want to be in Asia if the U.S. is not going to be affected at all?”

In the U.S., Fed policy makers left the target rate for overnight bank loans unchanged in August and September after 17 straight increases since June 2004. The Hang Seng has gained 5.5 percent since the streak ended, beating the MSCI Asia Pacific’s 4.1 percent gain. The S&P 500 has climbed 7 percent.

Real-Estate Effect

The Hong Kong Monetary Authority, the city’s de facto central bank, also held its key rate steady to preserve the local currency’s 22-year-old peg to the dollar. Its value is maintained in a band between 7.75 and 7.85 to the dollar.

Companies with real-estate investments, including 19 of the index’s 34 members, may benefit from the end of rate increases. Home sales reached an 11-month high in September as banks cut rates and offered incentives, the Hong Kong government reported. Sun Hung Kai Properties Ltd., the city’s largest developer by value, has gained 2.3 percent since rates stopped rising.

Hong Kong tends to outperform the Asia-Pacific region after the Fed stops increasing borrowing costs. In the month after the previous halt on May 16, 2000, the Hang Seng climbed 8.4 percent and the MSCI Asia-Pacific fell 1.7 percent. A month after a rate freeze on Feb. 1, 1995, the Hong Kong index jumped 13 percent as the MSCI index lost 3.4 percent.

Chinese Influence

This time, the local market is benefiting from demand for China-related stocks. Gains in the yuan are helping companies cut the cost of dollar-based debts and expenses, along with increasing returns for investors.

Since China’s central bank ended a decade-old peg to the dollar on July 21, 2005, the yuan has risen 2.6 percent. The prospects for further gains prompted Merrill Lynch & Co. to raise its recommendation on Hong Kong stocks to “market weight” from “underweight” in August.

China Mobile Ltd. is the Hang Seng’s second-best performer in the past three months. The world’s largest cell-phone company by customers has increased 30 percent. China Life Insurance Co., the nation’s biggest insurer, has climbed 31 percent.

ICBC, the biggest Chinese bank by assets, is seeking to raise as much as $19.1 billion in its IPO, according to four people who are involved in the sale. The shares will be sold on the mainland in addition to Hong Kong.

Seeing More Risk

Even if the sale falters, Hong Kong may do well because investors see the city as a relatively safe bet in Asia.

“There’s no question that the risk perception of north Asia has creeped up,” said Jorry Noeddekaer, who helps manage $1 billion of Asian equities at New Star Asset Management Ltd. in London.

“If you were a global fund and you want to move out of big, liquid stocks in north Asia, you need another big, liquid market and there’s not many others out there,” he said. “To that extent, Hong Kong will benefit.”


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