für Stox: Small is better for HK investors

Asia Watch: Small is better for HK investors
By Joe Leahy in Hong Kong
Published: March 26 2002 11:44 | Last Updated: March 26 2002 11:46



Hong Kong has been deeply in the doldrums for nearly two years, ignoring interest rate cuts and sharp rebounds in neighbouring countries.

But beneath the gloom, one group of Hong Kong stocks has enjoyed a surprisingly strong performance - the city's wealth of small- and medium-sized manufacturers and exporters.

"These stocks are the closest you can get to buying exposure to the part of Hong Kong that is quite successful," said Xen Gladstone, equities analyst with ING Barings in Hong Kong.

Leading examples include Texwinca Holdings, a textile company with manufacturing operations on the mainland, which on Tuesday was trading at HK$4.475 per share, up 122.22 per cent from last year, and Techtronic Industries, a power tool manufacturer and exporter, which at HK$5.40, was up 228.31 per cent over 12 months ago.

By contrast, Hong Kong's benchmark Hang Seng Index was down 49.72 points, or 0.46 per cent, at 10,786.92 - a loss of 5.3 per cent this year, on top of a near 22 per cent fall during 2001.

The weakness in the broader market has been caused by declines in the city's largest stocks, the conglomerates, which have heavy exposure to property and other sectors in Hong Kong's weak domestic economy.

Cheung Kong Holdings, the largest developer, for instance, on Tuesday was trading at HK$67.75 per share, down 17 per cent compared to a year ago, while Swire Pacific, a leading conglomerate, was trading at HK$41.10, also down nearly 17 per cent from last year. Cheung Kong has a market capitalisation of about HK$156.92bn compared with HK$3.12bn for Techtronic.

The root of the problem is an emerging dichotomy between the export and domestic sectors of Hong Kong's once robust economy, Goldman Sachs said in a research report.

The city's export-oriented sectors, which includes manufacturers like Techtronic and Texwinca with head offices in Hong Kong and factories in lower cost China, tend to do well when the global economy is strong.

Those companies serving the domestic economy, however, such as many of the city's banks, retailers and property developers, are suffering from a deflationary spiral that has gripped the territory since the Asian financial crisis of 1997/1998.

Hong Kong's currency is pegged to the US dollar. The only way the territory can offset any loss of competitiveness from the depreciation of regional currencies is through asset price deflation.

Goldman Sachs said while deflation would not hamper an expected recovery in Hong Kong's export sector this year, it would continue to limit the performance of the domestic economy.

It called for "a diversification of equity holdings in favour of companies that are well-positioned for external sector growth and global recovery".

ING Barings Mr Gladstone said that is what many investors have been doing by concentrating on the market's smaller exporters.

"A lot of them have fantastic return on equity and pay a decent dividend. And these are the companies that are capitalising on China," Mr Gladstone said.