Warren

Recently I asked my friend Warren what he thought of the stock market. As always, he gave me an insightful response.

Here you go:

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Dear Szeto,

As spoken, here are my humble views. I tend to believe that we are in 2004 rather than 2002.

1. QE +/- QE2 generate a huge wave of US dollar carry trade; hot money is flooding everywhere (like the role of Japanese Yen in 1990’s and 2000’s).
2. Investors gradually rebuild their confidence in stock markets when recent figures suggest low likelihood of double-dip recession in US though the recovery is stagnant.
3. The recovery of US economy is stagnant due to high unemployment rate, low mood of enterprise/individual financing and strong tendency of deflation with the fall in property price; hot money won’t stay in US and go to emerging markets and commodity nations.
4. Positive wealth effect has already occurred in the emerging economies because of blossom in property and stock markets; this drives economic growth and inflation and further attracts hot money.
5. Based on these 3 parameters: ratio of property price/annual income, ratio of monthly mortgage repayment/monthly income and gap between yield of 10-year US bond and rental return rate; the average HK property price is about 20% above its historical mean; of course this estimate is getting less representative owing to the polarization of property market; but smart money will probably choose to leave for stocks.
6. Opposite forces acting against each other in China: rising wages of blue-collar class and demand for goods and service; rising middle class and demand for better living environment / luxury goods; over/redundant investment of local infrastructure leading to overcapacity and bad debt; correction of overheated property market and possible negative wealth effect may occur in 1Q/2Q of 2011.

Therefore, my projection is:

1. Both property and stock (as well as commodity) markets will continue to rise, but the fundamental factors favor stock market in emerging markets rather than property market.
2. The whole world’s hot money rush to small emerging markets, this boosts a super bull market here. (Assuming that there is an interest rate increment by 2%, the calculated HSI by 2013 will be 40000-45000.)
3. The rise in stock market will only be limited to certain Chinese domestic consumption business sectors and commodities at least over the next 2 quarters till we can have a clearer picture of the correction of property markets in 1Q/2Q 2011.
4. There will be real surge of stock market in 3Q 2011 if there is no bubble-burst over-correction of Chinese property market early next year. Chinese banks and insurance sector will be the market leader by that time.

However, if there is really over-correction of property market, bad debts of the local government and major banks will rise substantially and the effect is quite unpredictable. I would love to hear your view too!

Sincerely, et cetera.