Hot money inflow can cushion rate-hike woes
Weeks before the US Federal Reserve was to decide on whether or not to raise interest rates, the stock market had set the direction based on inflation and other economic expectations.
Following the surge in US bond yields, Hong Kong ’s benchmark one-month interbank rate had risen to more than 0.6 percent on Wednesday — the highest level in eight years, from around 0.2 percent earlier this year. It seems obvious that the market has taken the view that the projected increase in inflation will drive up interest rates at a much faster pace than earlier expected.
Surprisingly, expectations of higher borrowing costs have pumped up asset prices in Hong Kong rather than depressing them as common wisdom would suggest. The local stock market was basically tracking the rally in the US, backed by strong buying support, especially in the financial and commercial sectors. Even the market’s supposedly rate sensitive property sector has made steady gains in recent weeks.
The government’s measures to cool the proper ty market have discouraged some investors, resulting in declining transactions. But, homes prices have continued to surge because many first-time buyers who are not affected by the latest cooling measure are making a dash to take advantage of the low interest mortgage loans before higher rates set in.
Some property experts and investment analysts have predicted that faster-than-expected rate hikes next year will push property prices down by an estimated 10 to 15 percent in the first half of 2017. Others disagree. They expect strong housing demand to continue propelling property prices, while real interest rates will remain low because of rising inflation.
DTZ — a major property agent — has said it expects average homes prices in Hong Kong to go up by 5 percent to 10 percent in the first half of next year.
In making investment decisions in these intriguing times, investors have to take into account the inflow of capital from neighboring economies that is having a major impact on asset values and interest rates. There’s little reason to believe that the inflow of capital, or hot money, will stop, or reverse, anytime soon because of the strong demand for Hong Kong dollar-denominated assets by regional investors to hedge against the depreciation of their respective currencies against the US dollar.
There’s little reason to believe that the inflow of capital, or hot money, will stop, or reverse, anytime soon because of the strong demand for Hong Kong dollardenominated assets by regional investors to hedge against the depreciation of their respective currencies against the US dollar.”