BLOG: Is it time to buy Hong Kong shares?

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Political tension in Hong Kong has seen the Hang Seng index slide, while sharp drops in the currency forced the monetary authority to announce emergency measures.

The situation in Hong Kong is undoubtedly uncomfortable from a political point of view, but should it make any difference to investors? The question is pertinent because if it isn’t likely to make a long term difference to companies in the region, investors can now snap up Asian stocks at a cheaper price.

18th century nobleman and scion of the famous banking dynasty, Baron Rothschild, is credited with the macabre comment that ‘the time to buy is when there’s blood in the streets.’ This is seen as the siren call for the contrarian investment philosophy – you need to buy when everyone else is selling and that’s usually when there is some kind of crisis.

That is fine in theory, but fiendishly difficult to do in practice. For example, judging whether the problems in Hong Kong are likely to have a long term impact on the economy is tricky. The protests have already forced 17 banks to announce the closure of 36 branches. The Hong Kong monetary authority has been forced to inject new liquidity into the banking system to allow it to function properly. If these difficulties persist, they could well have an impact on the economy and, in turn, on share prices. 

Russia is a good example of a stock market that has looked cheap for a long time. Investors using the ‘blood on the streets’ philosophy might have bought in when the Ukrainian crisis began at the start of February. At that point, the Micex index dropped to 1,248. And they would have made a little bit of money – it has since risen to 1,426. However, investors may have also been tempted to buy Russia during any number of its previous crises over the past five years, and they would have lost out when the real crisis hit. The country is still mired in problems and no-one is sure on the economic impact of sanctions or how long the Ukrainian crisis will persist. It is a precarious way to try and make money. 

That said, buying companies at cheaper valuations is usually protective. Part of the problem was that the Hang Seng had just hit fresh multi-year highs. When markets are already trading at high valuations, threats tend to be dealt with more savagely by investors.

In general, contrarianism is a good philosophy to invest by, and political tensions do provide opportunities to buy stocks at cheaper levels. However, it is hard to do in practice, and investors may be best leaving it to the expert contrarians – such as fund managers Alistair Mundy at Investec, or Kevin Murphy and Nick Kirrage at Schroders.

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