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Tuesday, June 25, 2019, 00:31
Expectation of interest rate cuts lifts up investors
By Peter Liang
Tuesday, June 25, 2019, 00:31 By Peter Liang

After several stressful weeks of social and political tension, Hong Kong investors have finally found something to cheer them up.

Their uplifting mood late last week was reflected by a surge in share prices and daily turnover on the stock exchange. The benchmark index, although faltering slightly on Friday, shot up an aggregate of nearly 1,000 points. Most encouraging was that the rally was led by the technology and property sectors, which are widely seen as the barometer of investors’ confidence in the economy.

Any progress toward detente is good news for Hong Kong’s investors. And they need it to find relief from the noise of constant protests and confrontations

Such confidence has been attributed to a combination of factors. Among them are indications of renewed progress in trade talks to resolve the trade dispute between the United States and the Chinese mainland. Later in the week, investors’ expectation of a rate cut in July was lifted by the dovish statement from the US Federal Reserve. All these were happening while the social and political tension that weighed heavily in the minds of many investors and homebuyers began to ease after a controversial bill was shelved indefinitely.

To be sure, the trade dispute is not expected to be resolved anytime soon; the argument against a rate cut in July has remained strong; and radical students have vowed to continue the fight until the proposed extradition law amendment bill is scrapped. What’s more, worries about the slowdown in economic growth, which began in the first quarter of this year, have continued to linger.

But none of these concerns seemed to have depressed investors’ mood, especially when they see that many prospective homebuyers who have stayed for so long on the sidelines are now rushing back into the market, snapping up available properties in the primary and secondary markets. Analysts who were expecting a glut earlier have hurriedly revised their forecasts, predicting a price increase of 10 to 15 percent in 2019.

The easing of the social tension certainly helped to encourage renewed interest in local properties. But the major driving force behind the latest buying spree is coming from expectations of interest rate cuts.

For many prospective homebuyers, interest rate cuts that are expected to be modest would make only a small difference to their debt servicing costs. But the interest rate downtrend could touch off another round of property price escalation, which tends to feed on itself by sucking in more and more investment funds from homebuyers and investors alike.

Indeed, central banks of many developed economies are seeing the need to pursue a loose monetary policy by cutting interest rates and boosting money supply to stimulate economic growth. The US has been an exception largely because of its strong economic growth and robust job market. The Fed has raised interest rates multiple times in the past two years in addition to engaging in quantitative tightening to soak up excess liquidity.

Those rate hikes had a direct impact on Hong Kong through the linked exchange rate system. Thanks to the inflow of external capital, mainly from the Chinese mainland, Hong Kong banks were able to keep local interest rates unchanged as corporate loan demand continued to shrink. But the so-called “interest rate scare” was sufficient to dampen demand for properties, forcing average prices down in the second half of last year.

The property down cycle was checked earlier this year when the Fed, worried about the sustainability of the US economic growth momentum, changed its stance, calling for patience in rate deliberations. Now, it is expected by many economists to take preemptive action by cutting rates in July to forestall any economic weakening, while the inflation rate, a major concern of central banks, has remained low.

Investors have been further encouraged by the expected meeting between Chinese President Xi Jinping and US President Donald Trump on the sidelines of the G20 Summit in Osaka this week. The meeting between leaders of the world’s two largest economies is seen to signal a restart of talks that can lead to the settlement of the trade dispute that is threatening to hinder global economic growth.

Hong Kong, of course, is particularly vulnerable to the fallout of the trade dispute because its economy is so heavily geared to servicing trade and investment needs of the Chinese mainland. The bulk of Hong Kong’s external trade consists of shipments to and from the mainland, and its stock market thrives as an important source of capital for mainland enterprises, many of which are listed in Hong Kong.

For that reason, any progress toward detente is good news for Hong Kong’s investors. And they need it to find relief from the noise of constant protests and confrontations.

The author is a current affairs commentator.

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