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HONG KONG: With the Hang Seng at its highest in more than a year, some analysts are warning of a correction ahead.
They noted on Tuesday that the global economic recovery is still not certain, and weak data from the US or China could send investors on a flight to safety.
Since the beginning of this year, the benchmark Hang Seng Index has climbed by about 50 per cent, shooting past the 22,000-point level. Compared to a 20-year average of around 14 to 15 times price earnings, index constituents are now trading at 18 times.
Alex Wong, director of Ample Capital, said: "Right now, we're basing our investments on expectation. People are now revising their forecast for 2010. That's why on 08/09 historic figures, the valuations are seen as extremely expensive."
Chinese social-networking platform Tencent, which is riding high on the high-growth Internet market story, is now trading above HK$120 or PE of around 40 times.
Former Chinese battery-maker BYD has seen its share price increase five-fold after transforming itself into an electric carmaker. News that famed US investor Warren Buffet has taken a stake in it has also helped.
A recent survey has shown that investor confidence is up for the second quarter. But according to JP Morgan Asset Management, which conducted the survey, about 60 per cent of the respondents still think that the local stock market is volatile.
Some have warned that a major correction may be underway if US and China economic data disappoint.
"From time to time, we'll probably have some choppy correction, but the real key for Hong Kong is the US dollar trade. Right now, we do not see any sign of US dollar bottoming," said Mr Wong.
The US dollar carry trade has become a new source of funding here – a weaker greenback and low interest environment have seen liquidity inflows into the markets. If there is flight to safety, a 30 per cent correction could be on the cards.
- CNA/so
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