Hong Kong stocks

A sober warning from someone who knows something about tips. Ronald Arculli, chairman of Hong Kong Exchanges & Clearing, and former head of the Hong Kong Jockey Club, told Bloomberg he is not a buyer of stocks traded in the territory. Investors seem to disagree. The benchmark Hang Seng Index is up by a half from its March low, and Hong Kong commands the biggest overweight position in Asian fund managers' portfolios.

Part of this is due to emerging markets exuberance and a charge back into riskier assets. Flows into Asian ex-Japan funds collapsed last year but have since risen 6 per cent, according to EPFR Global, which tracks fund flows. Hong Kong's role as international investors' conduit into China, where Beijing is spending its way to a projected 8 per cent rise in economic output, burnishes its appeal. Chinese-related companies account for just over half the Hong Kong stock market but currently two-thirds of its turnover.

In relative terms, the market does not look overvalued either, on 15 times this year's estimated earnings. That rating is in line with the US, about a quarter cheaper than China and one-third the level of Japan. The usual clues that the market has topped out – share placements by the territory's property developers – are also not yet in evidence.

Still, investors seem to have lost sight of any potential downside. Hong Kong's economy is expected to contract by 2-3 per cent this year. Unemployment is rising; retail sales have collapsed. Much of the cheer from across the border is also illusory. Yes, the stock market is thundering ahead but government funds are swelling the ranks of buyers. Industrial profits are plunging. The Hong Kong stock exchange's own share price has been the city's sixth best performer so far this year. Its boss has now, in effect, put a sell on the stock.