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Investors in Asia could be going ape for Hong Kong property stocks this year

Asian markets have been strong in the first few weeks of the year and there are indications of some broadening of interest, with good upward moves in Hong Kong, China H-shares and Thailand, which were all rather in the shadow of India and Korea last year. But what does 2006 hold in store?

The positives for Asia have been well documented. Growth is strong and likely to remain so, particularly in China and India. Inflation seems to be well contained. Much of the deflationary force which is so apparent worldwide emanates from Asia, where surplus labour abounds and infrastructural development is relentless. Borrowing is generally contained, savings rates high and property prices in most sectors and economies well below their peaks of the 1990s. Stock prices remain at a discount to their Western equivalents, selling on an average multiple in the low teens and with another year of double-digit earnings growth in the pipeline.

The most likely outcome for this year is that the bull market which started in Asian stocks in 2003 will continue. It may be that last year’s best performing markets will continue to power ahead but better value would seem to be found in Thailand, Hong Kong, China and Singapore, where less euphoria is priced in.

Banks in Thailand, commodity and energy stocks in China, property companies in Hong Kong and marine companies in Singapore are just some of the areas which could benefit from rising demand but had a relatively quiet 2005 in stockmarket terms.

Volumes have been particularly high in Hong Kong, suggesting an improvement in local sentiment. Despite a firm undertone, the residential property market was quiet for much of last year and substantial new issuance of mainland Chinese shares provided something of a cap on the equity market. Anticipation that US interest rates may peak in the first half of the year, and perhaps fall in the second, is encouraging investors back into local property shares while recent upgrades of mainland economic growth figures has prompted buying of Chinese financial, auto and commodity shares quoted on the H-share markets.

In Singapore, confidence is buoyed by an improving property market and anticipation of the upcoming tenders for the Sentosa and Marina gaming development projects, as well as continued strength in the marine sectors. In Thailand, there are very encouraging signs of accelerating foreign investment flows while the banking sector’s non-performing loan ratios are falling as new loan demand improves.

There is abundant evidence that economic expansion is accelerating a confidence which has been rebuilt substantially following the economic crises of 1998 and subsequent restructuring. The recovery taking place in Japan and gradual opening up of China are additional factors contributing to a broadly-based bull market based on rising asset values and domestic demand.

Asia remains susceptible to rising energy prices and any fall in demand for its manufacturing products from Europe and the US but, given current valuations, any setback should be short-lived and the trend towards currency appreciation should continue.

Which stocks and sectors are likely to provide good returns in 2006? Hong Kong property has been recovering for the past three years but prices and rents are still as much as 50 per cent below old highs in some cases, despite tight supply and strong growth in the local economy. Any indication that US rates have peaked should see a further rise in prices.

China stocks have been restrained by concerns over growth and weakness in the A-share market. These concerns should give way to enthusiasm for the H-share market in Hong Kong, where corporate governance issues are less pronounced and valuations low in many cases. In Singapore, the marine sector has benefited from early signs of increased exploration activity and the strong shipping market of recent years. Despite this, many stocks were quiet in 2005 and should move appreciably higher as order books improve further.


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