| | Thoughts amidst turbulence - Week ending 1/9
It must be cautioned that Hong Kong's Prime Rate is likely to increase, probably by 25 b.p., should such high HIBOR rate sustain for another week (100 b.p. = 1%). 3-month, 6-month and 1-year HIBORs have increased and stayed at over 4.7% p.a. level. As banks have to pay for non-interest operating expense (such as wage and rents), the interest spread (the difference between interest rate charged and paid by banks, representing the profit margin) is about 300-325 b.p. for a 7.75% prime rate, which are slightly better than breaking even. Despite the weak loan-to-deposit ratio (74% for HK$ at end-June, and 54% for all currency) and stable interbank liqudity (at around HK$1.3 billion), prime rate will probably be increased, by 25 b.p.
Many in the US guess the Fed will turn more aggressive in reducing Fed Fund Target Rate towards this end of this year, because of the fear in recession, of the Sub-prime turmoil, of underperforming housing market. My guess is if recession is expected for next year, if Sub-prime is going to have real impact on the economy, and if the underperforming housing market, because of time-lag in monetary policy - the impact of TODAY's action will appear 2-3 quarters later, the Fed should reduce its rate immediately, rather than waiting until everything is over.
If this is correct, the fact that the Fed does not act aggressively today may be due to its belief that these worries are only temporary or, whatever the Fed does it is not gonna rescue. I suspect the Fed still believes the Sub Prime woes are not short term and is going to affect long term growth issues.
The local stock market remains robust this week, closing at 23,984 or about 1,060 poitns higher than last week close. Everything you name it - still-awaiting capital inflow from the Mainland, solid local and Mainland economic outlook, good atmosphere - contributes to the recent rally. If my prediction on interest rate increase is correct, it might hurt the local growing economy but not very much. Spending a bit (Hong Kong guys are very low leveraged on credit card loans), investment a bit but in overall terms, the economic impact of an 25 b.p. increase should be minimal.
Conceptually, interest rate increase hurt the real estate developers twice - interest expenses increase and the value of the saleable flats decreases, while for most other companies, only the first impact matters. So pay attention to certain highly debted HSI constituents such as New Word Development (0017.hk, Debt to Asset > 20%), Whampoo Hutchison (0013.hk, 0.09 EBIT to Interest Expense last year), CX airline (0293.hk, Debt to Asset > 30%), CK Infrastructure (1038.hk), and avoid property developers with heavy local development. All have very low EBIT to Interes Exp ratio (ratio lower than 1 implies that it's earnings cannot pay interests were there no such below line items like ExtraOrdinary Items and tax arrangements).
Investors should also pay attention to smaller companies that are highly leveraged. On the other hand, Internal demand driven China-related companies should be less sensitive to interest-rate of Hong Kong, though the value of all assets is negatively related to interest rate.
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| | Posted 9/1/2007 11:48 AM - 62 Views - 2 eProps - 1 Comment
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