Market watchers see bear signs wherever they look

If you’re still wondering whether a bear market is here, listen to the experts at Morgan Stanley, one of the world’s leading investment banks and a major player on the Hong Kong Stock Exchange. Their prognosis on global stocks in general and the Hong Kong market in particular was nothing but downbeat. The United States investment bank predicts the Hong Kong market will be hit by the depressed Chinese mainland market which is expected to fall further in coming months despite the injection of fresh liquidity by the central bank into the system.

The Shanghai Stock Exchange benchmark index has dropped about 20 percent since the beginning of this year, pushing the index of Hong Kong-listed mainland enterprises, or H shares, down by the same proportion.

A combination of factors has been cited for threatening to turn the global stock market on its head. Some economists believe the momentum which has driven US economic growth in the past two years cannot be sustained much longer.

The onset of a recession has remained a distant possibility. But short-term growth could be hampered by rising interest rates, higher oil prices and the trade war between the United States and Chinese mainland.

On top of that is the specter of the Federal Reserve’s liquidity tightening policy launched to combat inflation, which has already exceeded the target rate of 2 percent. This may lead to a fasterthan-expected rise in interest rates that could depress economic activity and investment.

Some economists are worried that the benefit of tax cuts in the US would wear out soon, leaving behind a big increase in government deficit which could further push up credit costs.

Meanwhile, economic growth in Europe and Asia has remained lackluster, resulting in a flow of capital to the US to take advantage of the strong US dollar. Capital outflow has already created huge problems for some emerging economies,including Turkey and Brazil.

Rapid depreciation of the yuan in the past several weeks has raised concern among foreign-exchange traders in Hong Kong, which hosts the largest offshore yuan market. Traders fear the weak yuan could trigger competitive currency depreciation in other Asian economies, leading to a massive outflow of funds from the region.

The linked exchange system has made Hong Kong a favorite destination for hot money. The large capital inflow in the past was seen as the major driving force behind the rapid rise in asset values. But the widening interest-rate differential between Hong Kong and the US has given overseas investors an incentive to withdraw some of their money from Hong Kong.

The net outflow of capital from Hong Kong in the past few months has remained manageable. The resulting contraction of liquidity in the banking system has rapidly pushed up the benchmark interbank rate, which represents banks’ cost of funds. But banks have adamantly kept the important lending rates unchanged to avoid upsetting the highly geared property market, while mortgage lending has remained a major profit contributor to many banks.

Looking further ahead, the escalation of the trade dispute between the US and the Chinese mainland could pose a serious challenge to the important financial, export and trade services sectors of the Hong Kong economy. In the past fallout from a sharp economic growth slowdown could be mitigated by an increase in government expenditure on infrastructure development.

The massive infrastructure projects undertaken by the government or Mass Transit Railway since the onset of the global recession in 2008 are either completed or near completion. The government is left with few options, other than building a third airport runway, to maintain the momentum of growth when there is a downturn in private-sector economic activity.

The government is making great efforts to help diversify the economy by promoting technology industry development. Authorities are also working with the private sector to identify opportunities promised by the Belt and Road Initiative and Guangdong-Hong Kong-Macao Greater Bay Area project.

But investors should be prepared to fend off the onslaught of the market bear at the gate. It poses a real and immediate threat to both stock and property markets.