Irrational Investors10 October, 2008, 8:58. Posted by Zarathustra
Since I relocated to London, I have been further away from the Hong Kong market which I was based in. Because of time difference and relatively little coverage of Asian markets in the news here, today is the first time I really look at the stocks prices in Hong Kong. To me big shocked, valuations look incredible cheap.
I forecasted at the height of Hang Seng Index (about 30,000) that Hang Seng Index will dropped to at least 23,000, but it took almost half a year to make this forecast came true. Since it has hit 23,000, I have not made any prediction as I don’t know what to expect under such a situation. Now, the Hang Seng Index closed today at 14,796.870, which has declined more than half of the height last year.
Valuation seems to be unreasonably cheap. It is quite clear to me now that the scope current turmoil is so broad and investors are pretty irrational. Stocks quotes all turned red no matter how the companies perform financially or whether they are badly affected by the credit crisis so far. For Instance, many stocks in Hong Kong are Chinese enterprises. Even though China economy is slowing, it is still one of the fastest growing economies in the world. I do believe that the earnings growth of Chinese firms have reached a peak in 2007, what I don’t believe is the peak of earnings growth has such a dramatic event on the stock prices. In short, I firmly believe that at this stage, the endless downward spiral in global stocks has more to do with weak confidence, rather than something really fundamental.
The most urgent things governments and central banks need to do now is to restore confidence, obviously. But so far their efforts do not have much effect.