“I’m quite pessimistic,” said Alex Tang, chief market strategist for ASA Wealth Management in Hong Kong. “There could be recessions in the U.S. and Europe and much slower growth and maybe a hard landing in China.”
This year has been bad enough. A stubborn debt crisis in Europe, struggling economy in the U.S. and inflation and slowing growth in China have made 2011 a turbulent and forgettable year.
Hong Kong’s Hang Seng Index, which includes numerous big Chinese companies, ended a six-day losing streak on Friday, rising 1.4% to 18,285 on weak turnover. But it still ended the week 1.6% lower. The index of Chinese companies fell 2.0%, 200 points, for the week to close at 9,867.
For the year, the Hang Seng has tumbled 21%.
Tang sees more losses in 2012. No one can guarantee future stock prices, but his gloomy assessment is worth considering. After earning degrees at the University of Wisconsin and Chinese University of Hong Kong, Tang has engaged in a long career as an observer of the Hong Kong market. He is credited with coining the term “red chips” in the early 1990s to describe companies set up and listed in Hong Kong by large Chinese enterprises.
Tang departed from market consensus to anticipate turnarounds in the volatile years of 2008 and 2009.
In late 2007 Tang, then head of research at Core Pacific Yamaichi, predicted the Hang Seng would slip from a 2007 high of 31,958 to around 25,000 in 2008, according to a copy of the brokerage’s 2007 Yearly Investment Strategy report.
Other major brokerages forecast the Hong Kong market would extend 2007’s rise, Tang said. In fact, the Hang Seng and other global markets plunged. True, the steep drop far exceeded Tang’s prediction, but the direction was correct.
Then when many analysts said the misery of 2008 would continue in 2009, Tang’s Investment Strategy report asserted the Hang Seng would jump from 14,387 at the end of 2008 to “challenge 20,000.” Again, he got the direction right.
Two good calls could be luck (Tang moved into sales at Core Pacific Yamaichi after 2009, out of the predicting end of the business). And he’s not alone calling for bad times in 2012.
But the possibly useful thing for investors is that Tang’s previous forecasts picked out important factors that shaped market direction. For example, he saw that a divergence of price movement and trading volume indicated Hong Kong stocks were headed down in late 2007.
It could be helpful for investors to consider why he thinks 2012 will be bad.
One tool he relies on is a chart provided by the Economic Journal of Hong Kong. It follows Hong Kong market PE levels taking into account inflation and dividend levels. It shows that in the last 30 years the Hang Seng Index has risen sharply to a peak every six and one half years. Not six and a fourth or seven years, but regularly every six and a half years.
That would put the next peak in 2013.
On the economic front, Tang sees the trend to substantially cut spending in America and Europe as one thing that increases the threat of a recession in both areas.
And in addition to painful economic conditions, political gridlock in the U.S. and Europe is eroding consumer confidence. “Consumer confidence is a major concern,” Tang said.
Also in the political arena, Tang thinks the U.S. election in 2012 will promote more posturing and more rigid gridlock. The scheduled change in leadership in China in late 2012 will discourage major changes in policy to address economic problems.
The gloomy outlook doesn’t necessarily mean investors should sit on their hands, according to Tang. In the pessimistic Core Pacific Yamaichi forecast for 2008, he called for “a year of accumulation.”
If investors had followed that advice, they would have profited in the strong rebound of 2009.
Now Tang says, “Next year there will be a sharp decline. It will be a very good year to start accumulating blue chips.” End
Hong Kong Blue Chips: +259, +1.4%, to 18,285, 12-16-11, Hang Seng Index
Chinese Stocks in Hong Kong: +189, +2.0% to 9,867, 12-16-11, HSCE Index
Shanghai Stocks: +2.0%, 2,225, 12-16-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: -4.1, to 352.0, 12-15-11, Bank of New York Mellon, ADR Index-China
Insight: Rebounds in U.S. and Mainland Chinese markets helped Hong Kong end a six-day losing streak, but volume remained weak.
Quotable: “There are rumors that the Chinese central bank will decrease its required reserve rate (RRR) again this weekend. Investors can keep an eye on the performance of A-shares today to observe is there any stimulation effect brought by the rumor.” CSFG. 12-16-
Chinese Company to Watch: “Johnson Electric (JELCY) is a beneficiary of soft commodity price – Maintain BUY. Domestic copper price retreated 9% since end-October while steel price still hovering at low level. Given that the two materials account for almost 45 percent of Johnson Electric’s (0179.HK) cost of goods sold, we expect company to enjoy margin expansion in 2HFY12.” Guoco Capital. 12-16-11
Brokerages and analysts cited have disclaimers on their websites emphasizing their statements are for information only. They do not endorse my blog, and I don’t endorse them.
For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN