BlackRock Cuts Hong Kong Investment, Sees Prices Drop

BlackRock Inc. is reducing its investment in Hong Kong, betting the city’s equity and property markets will trail other Asian countries as growth slows in the world’s two biggest economies.

Hong Kong stocks may underperform as the U.S. pares stimulus and China tightens credit, said Andrew Swan, head of Asian equities at BlackRock, the world’s largest money manager with $4.1 trillion in assets as of Sept. 30. Home values in the city may fall more than 10 percent into 2014 amid government measures to curb prices and rising U.S. interest rates, he said.

“Hong Kong is in a challenging position at the moment,” Swan said in an interview on Oct. 10, adding that the firm had sold shares of companies based there in the last 12 months. “You’ve had very strong liquidity as China leveraged up and you’ve had very low cost of credit because of the currency situation. Now both of those things are changing.”

The Hang Seng Index has risen 1.9 percent this year compared with an 18 percent advance by the MSCI World Index of developed-nation shares. Hong Kong’s equity benchmark more than doubled from Oct. 27, 2008, as loose global monetary policy after the Lehman Brothers Holdings Inc. crash channeled money into the city’s assets. The Hang Seng Index dropped 0.6 percent today in Hong Kong.

An influx of mainland Chinese buyers, near-record low interest rates and a lack of new supply have made Hong Kong the world’s most expensive property market. Home prices in the city surged since the end of 2008, prompting the government to introduce property curbs. Prices fell about 3.1 percent since peaking in March and the number of homes sold in the city last month slipped to 3,686 from 7,301 a year earlier, according to the Hong Kong Land Registry.

Fed Tapering

The real-estate market also faces pressure as the Federal Reserve prepares to trim record stimulus. With the city’s currency pegged to the dollar, the market tracks rising rates in the U.S., which translates into higher mortgage costs. Hong Kong’s benchmark 10-year government bond yields have climbed about 90 basis points since Feb. 1 through yesterday. Economists surveyed by Bloomberg expect the Fed to reduce bond purchases in December.

“Volume generally leads price and therefore if we go down the path of tapering, given there is no volume in the property market here, I think you’re going to see prices start to fall,” Swan said.

China Liquidity

The flow of funds into Hong Kong may also slow as China reins in easy credit. Data this month showed money-supply expansion slowed to 14 percent last month from a year earlier and the broadest measure of credit fell to 1.4 trillion yuan ($229.4 billion). A government-engineered cash squeeze in June to curb shadow banking sent money-market rates to a record high. The central bank may tighten monetary policy well into 2014 to tackle inflation risks, Nomura Holdings Inc. said in a report dated Oct. 14.

“The environment is shifting, so the asset bubble we have here is at risk,” said Swan. “China’s credit can’t keep expanding and U.S. interest rates won’t stay low, and therefore Hong Kong interest rates have to move up. My view is that tapering will commence in the next six months.”

Structural changes, such as Shanghai’s free-trade zone, may lead investors to question the significance of Hong Kong as China moves to further open its economy, encouraging large businesses to relocate, he said. Shanghai last month inaugurated the 11-square-mile zone as a testing ground for free-market policies that Premier Li Keqiang signaled may be implemented more broadly in China.

China Reforms

“There are a lot of equities in Hong Kong that are driven by factors outside of Hong Kong and may actually be beneficiaries if China does go down the path of structural reform,” said Swan. “There are companies or individual securities which could end up having a good year, but overall with financials having such a large exposure here, the market may struggle.”

Swan said in July he favors Asia’s Internet and technology stocks based on growth opportunities. BlackRock continues to hold shares in the sector although it reduced its position after recent gains. Tencent Holdings Ltd., China’s biggest Internet company, has surged 51 percent since its recent low in June through yesterday, while Samsung Electronics Co., Asia’s largest technology company, jumped 10 percent in the period.

Korean Shares

One country where BlackRock has increased holdings is South Korea, where companies in some sectors are forecasting better-than-expected earnings, Swan said. Boosted by a weaker yen, Japanese exporters are focused more on profitability than expanding market share, making them less a threat to Korean competitors. Philippine stocks have been a key overweight as the nation’s economy remains robust, he said.

BlackRock still favors Macau casino stocks, though a recent surge in the shares prompted it to cut holdings.

“It’s really important to know Asia still has pockets of attractiveness even if headwinds are still there for overall growth,” Swan said. “We’re still seeing lots of good opportunities in the market.”

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