Tuesday, October 18, 2011

Updated 2011 HK HSI and Shanghai SSEC Index targets

First of all, we, Mr China, announce to cut our 2011 Shanghai SSE Composite (SSEC) Index target by 8% to 2417 (was 2629), mainly because of a downgrade in Financials and Industrials.

To reflect this SSE Composite (SSEC) Index downgrade, we at the same time cut our 2011 Hong Kong Hang Seng Index (HSI) target by 11.4% to 19456 (was 21960).

Here we want to explain a little bit why we target a bigger loss in Hong Kong Hang Seng Index (HSI) than Shanghai Composite Index (SSEC). Here are the two major reasons:

(1) Hong Kong as an Asia ATM

Hong Kong market is more open to foreign hedge funds than the relatively isolated market in the mainland China. Many hedge fund managers have set up their operations in Asia mainly due to two advantages. Firstly, there is an increasing demand from their investors for Asian exposures. Secondly, they understand that in order to make a success in Asian hedge fund markets they must have direct dialogues and closer on-ground relationships with Asian enterprises, local investment banks, regulators in Asia etc.

As China continues its limited opening-up, Hong Kong is an ideal place for global hedge funds operating in Asia. Famous international names such as Sirios and Whitebox have already started operating their hedge funds here for Asia. However, whenever a financial crisis happens, investors often choose to withdraw their money massively and to treat Asian hedge funds like Automated Teller Machines (ATMs). The massive withdrawals sometimes can lead to a large number of painful hedge fund closures or at least a huge erosion of capitals. To hedge the worldwide market volatility, many U.S. or Europe hedge funds usually prefer to make use of the high liquidity nature of the Hong Kong stock market to cash out their portfolios, and hence making Hong Kong a bigger loser as compared with the other equity markets in the Asian region.

In particular, since Hong Kong remained pegging its H.K. dollar (HKD) with U.S. dollar (USD), this USD peg policy had also invited a number of attacks by global hedge funds. It was especially obvious in difficult times between June to August 1998 when international hedge funds shorted Hong Kong Hang Seng Index (HSI) futures and shorted HKD currency at the same time in order to make profits out of the HKD-USD pegged exchange rate system. As most of the time hedge funds or opportunists can easily earn money by using the similar strategy, Hong Kong is well-known in the financial market as an "Asia ATM" (Automated Teller Machine) for global hedge funds. This is why Hong Kong HSI usually suffers a bigger loss than Shanghai SSEC for most global market downturn.

(2) Formula Change For Our own HSI Target Calculation

This new target also involves a change in our HSI calculation formula: we have increased weighting of the SSE Composite Index and have correspondingly decreased weighting of the USD Index for our calculation of HSI target. This formula change shall more accurately represent the fact that HSI is now increasingly dependent on the China economy and less dependent on the U.S. currency fluctuation.

According to our own rating system, the current SSE Composite (SSEC) level of 2359 and the current HSI level of 17592 should be respectively rated "reasonable" and "not expensive" (as of end 2011 Q3).

Again, these new calculated targets of 2417 (by our existing SSE Composite Index formula) and 19456 (by our new HSI Hang Seng Index formula) should automatically supersede our original 2011 SSE Composite Index Target and 2011 HSI Hang Seng Index Target respectively. Please be reminded that our calculated targets are just for 2011 and have not taken any 2012 factors into account.

UPDATES - Next posts: 2012 HSI Target as well as 2012 SSE Target


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