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WALL STREET, CALIFORNIA | SECTOR SPOTLIGHT / EVELYN
IRITANI

Getting Ready for a New Hong Kong Investing Game

June 10, 1997|EVELYN IRITANI

Want to place a bet on the Hong Kong stock market? Then choose carefully, take a deep breath and hold on for what promises to be a wild--but potentially profitable--ride, according to analysts on both sides of the Pacific.

With just three weeks remaining before the crown jewel of Britain's faded colonial empire returns to China, speculation abounds as to whether this Asian financial capital will survive under its new Communist masters.

Yet nowhere is optimism more apparent than at the stock exchange of Hong Kong, Asia's second-largest stock market, where investors have been throwing their money like there's no tomorrow at new listings of "red chips"--mainland China-backed Hong Kong companies.

Red-chip gains and strength in Hong Kong's own blue chips have fueled a 17% surge in the benchmark Hang Seng stock index since the end of March. The index hit a record high of 14,990 on June 2, and has since eased back to 14,655--still up 9% year-to-date, and up about 33% from a year ago.

Like many money managers, Richard Farrell, head of the Asian equity desk for Guinness Flight, a London-based investment group (see accompanying story) is skeptical about some of the more hyped red-chip issues. But he remains bullish about the long-term potential for the Hong Kong market.

Farrell acknowledges that the political climate may change, but he also thinks Hong Kong companies are uniquely positioned to profit from the marriage of Hong Kong's hyper-efficient business infrastructure with southern China's low wages and inexpensive real estate.

"We believe there's every chance that the combination of southern China and Hong Kong . . . will turn out to be the jewel in the crown of Asia both in the long term and in the relatively short term as well," said Farrell, whose Guinness Flight China & Hong Kong Fund has invested 97% of its money in Hong Kong stocks.

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Most Hong Kong-based companies, whether multinationals or locals, are increasingly betting their future on opportunities across the border. And mainland companies are coming to the Hong Kong market to raise capital.

After July 1, there will also be a growing number of mainland Chinese individuals pumping billions of dollars in pent-up savings into the Hong Kong market because it is regarded as much safer than the newly created Chinese exchanges, according to Richard McConnell, author of a new book, "The Investment Opportunity of a Lifetime--Hong Kong 1997 and Beyond."

"Can you imagine what will happen when $600 billion starts looking for a place to invest?" asked McConnell, a private investment manager. When the Hong Kong stock market reopens July 3 after a five-day holiday, some things are expected to not have changed.

Since the Hong Kong dollar will still be pegged to U.S. currency--at a rate of about $7.80 Hong Kong to $1 U.S.--the market will remain sensitive to interest rate fluctuations in the United States.

The Hong Kong Stock Exchange will also remain heavily influenced by real estate prices, with firms closely tied to the real estate industry accounting for 60% of the market, according to Michael Green, a property analyst with Salomon Bros. in Hong Kong.

After a slump a few years back, the land-starved colony has once again become one of the most expensive real estate markets in the world, leading some to worry about a speculative bubble. Last year, luxury apartment prices soared 40%.

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And the Hong Kong stock market has never been a place for the weak at heart, given its history of drastic swings. In the wake of Wall Street's 1987 blood bath, the Hang Seng index of 33 leading Hong Kong stocks plunged 50% and trading was halted for a week.

Just as the market started to improve, it took another hit when the Chinese government sent its tanks into Tiananmen Square on June 4, 1989. But in this decade, the market has climbed steadily.

Even veteran market watchers like Green, who has lived in Hong Kong since 1989, are working overtime to keep up with the market this year. After slumping 7% in the first quarter it has rocketed since as money has poured back in.

"In the shorter term, this high degree of volatility often does exert pressure on small investors," Green said. "If investors want to get exposure in this market, they should take at least a five-year view, rather than trying to get rich quick overnight."

Of all the Asian markets, Hong Kong is considered one of the best to invest in directly, because its stock exchange is closely regulated and highly transparent. But buying directly into the market from the U.S. means paying extra fees and taking on far greater risk, because it is difficult to monitor such a volatile market from afar.

A handful of Hong Kong stocks, including Asia Satellite Telecommunications Holdings Ltd. (ticker symbol: SAT) and Hong Kong Telecommunications Ltd. (HKT), trade in the U.S. as American depositary receipts, or ADRs. Those stocks trade like stocks of U.S. companies.

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