Dec. 4 (Bloomberg) -- Hong Kong stocks will trail the rest of Asia next year as property values sink in the world’s most expensive real estate market, according to JPMorgan Chase & Co.
The MSCI Hong Kong Index will lag behind a 15 percent gain in 2014 for the broader gauge of equities in Asia outside Japan, Adrian Mowat, JPMorgan’s chief Asia strategist, said in an interview in Hong Kong last week. Developers will trail as home values tumble about 30 percent in two years, while utility stocks will struggle as rising interest rates erode investor demand for dividend yields, he said.
“It’s difficult to see the MSCI Hong Kong doing well,” said Mowat. “What we think will happen in residential property values is that they will gap lower rather than being able to identify a smooth position.”
Barclays Plc, UBS AG and Bank of America Corp. are also expecting a Hong Kong real-estate slump. Mowat’s projection, which is in line with Barclays’, implies the biggest plunge since 1998. Rising wealth from house prices more than doubling since 2009 likely contributed half of the city’s consumption growth, the Hong Kong Monetary Authority said in March.
The MSCI Hong Kong Index rose 8.1 percent this year amid signs China’s economy is stabilizing. Eight of the biggest 10 declines on the gauge were local property companies, including Sun Hung Kai Properties Ltd. and Sino Land Co. The measure traded at 16.3 times estimated earnings, compared with 8.4 for the Hang Seng China Enterprises Index and 13.8 for the MSCI Asia Pacific Index. The MSCI Hong Kong Index slid 0.6 percent to 12,241.98 at the close today.
Hong Kong property prices reached an all-time high in March and are now the most expensive among the world’s major cities, according to realtor Savills Plc. The government since 2010 imposed additional taxes on non-resident buyers, doubled stamp duties and raised minimum mortgage down-payments to tame surging home values.
Prices have dropped about 2.6 percent from the record, an index compiled by realtor Centaline Property Agency Ltd. show. They’re still too high, JPMorgan’s Mowat said.
“The economic value of that apartment, that shop, that office is less than the price that the market wants at the moment,” he said. “We’re correcting property prices before there’s any move in interest rates.”
An increase in yields when the U.S. Federal Reserve pares stimulus will translate into higher mortgage costs in Hong Kong and is a reason to reduce investments in the city, BlackRock Inc. said in October. Expectations of rising interest rates “could gradually affect” the city’s property market, Financial Secretary John Tsang said in June.
With the city’s currency pegged to the dollar, the market tracks rising rates in the U.S. Hong Kong’s benchmark 10-year government bond yields climbed about 145 basis points, or 1.45 percentage point, this year through Nov. 28. The Fed may begin reducing its $85 billion in monthly asset purchases in March, according to the median forecast of economists surveyed by Bloomberg News last month.
Higher-yielding shares will become less attractive as interest rates rise, damping demand for utilities, according to Mowat. A gauge of utilities on the Hang Seng Index, which includes Hong Kong & China Gas Co. and Power Assets Holdings Ltd., dropped 4 percent this year through yesterday.
Power Assets is projected to pay a dividend yield of 4 percent in the next 12 months, compared with 2.3 percent for shares on the MSCI Hong Kong Index, according to data compiled by Bloomberg. CLP Holdings Ltd., Hong Kong’s biggest electricity provider, will yield 3.3 percent, the data show.
Gaming shares are a bright spot for the city’s stock market, according to Mowat. The top five gains this year on the MSCI Hong Kong Index were by casino operators, with MGM China Holdings Ltd. and Galaxy Entertainment Group Ltd. more than doubling their share price. The sector remains attractive for growth potential, Mowat said.
“It’s a very popular and crowded trade though, so if there were any earnings disappointment, people need to be very conscious of the downside risks,” Mowat said.
To contact the reporter on this story: Kana Nishizawa in Hong Kong at firstname.lastname@example.org