Hong Kong - Hong Kong's economy, like its weather, is heading into winter. But stocks are enjoying an unseasonal spring.
Tung Chee Hwa, the chief executive, warned on Monday the economy was showing no signs of recovery from its deepest recession in some 40 years.
Even as he spoke, Hong Kong stocks soared. After interest rate cuts at home and in China, the benchmark Hang Seng index gained 4,7 percent on Monday. But it retreated yesterday, ending down 0,59 percent at 10 367,12.
Bullish investors are betting overseas developments will spark a string of interest rate cuts in the next half-year and kick-start an economic recovery by mid-1999. But local economic data are getting steadily worse: gross domestic product (GDP) shrank 7 percent in the third quarter, and most economists expect unemployment will soar to a record 7 percent by year-end, undermining consumer demand.
"Full recovery, unfortunately, may still be some time away as far as Hong Kong is concerned," Tung said, a week after the government said it expected GDP to contract 5 percent this year, from 4 percent previously forecast.
But in a city of just 6 million people, suffering a recession sparked by developments overseas, investors who know the economy depends on government decisions in Japan, Russia and the US are not very worried by what their own leaders have to say.
"I'm not saying the government is wrong, but they are stuck in the present tense, and the stock market is in the future tense," said Alvin Owyang, the associate director at OCBC Securities. "Growth is going to accelerate from here on."
Bulls took new hope when Hong Kong banks cut their best lending rate by 0,25 percentage points on Friday. Hong Kong rates track US moves and, because the US Federal Reserve is expected to cut rates as much as half a percentage point in the next six months, local fund managers say Hong Kong's prime rate may come down as much as a full percentage point next year.
Investors say that means GDP could hold steady in 1999, instead of shrinking 2 percent, as economists have been forecasting.
With corporate borrowing costs coming down and mortgages looking cheaper to home buyers, fund managers argue that company earnings are likely to rebound next year. Even before the rate cuts, Ibes International showed analysts were forecasting average corporate earnings would climb 11 percent in each of the next two years, after dropping 20 percent this year.
"The stock market will not wait for earnings to turn; you have got to be ahead of the news," said Robert Conlon, the chief investment officer for Guinness Flight Hambro Asia, which expects an economic pickup from about mid-1999.
But some investors say the stock market is rising too fast, too early. John Lai, the chief investment officer at Nikko Global Asset Management, said he may sell some of his blue-chip property stocks if the market climbed further. - Dow Jones