Time To Buy Hong Kong?

Is the Hong Kong market a bargain or losing its edge?

With the Hang Seng Index trading at its cheapest valuation in 10 years – close to the valuations of Russia’s and Pakistan’s markets – it’s an important question.

So what’s wrong? A couple of things…

Crony Capitalism: The China-controlled government is blocking any political reforms. As a result, crony capitalism is steadily rising, with Hong Kong at the top position of a “crony index” put together by The Economist. The cost of living in terms of housing costs and food is soaring. Even the cost of groceries is 30% higher than in New York.

Manufacturing: A key pillar of the economy, manufacturing has almost completely migrated to other low-cost countries. And shipping, while still vibrant, is losing market share to lower-cost ports like Shanghai.

Now, given my experience with Hong Kong politics, the economy, and business over three decades, I must say these trends are a little concerning.

With China seemingly trying to marginalize Hong Kong in favor of developing Shanghai into the region’s leading financial center, you might think the “Pearl of the Orient” is losing its luster as the commercial and cultural gateway to Asia and that you should avoid investing in Hong Kong companies.

I wouldn’t bet on it for several reasons:

Hong Kong still has a well-earned reputation for being one of the world’s most open economies. That’s why 1,389 multinational companies base their regional headquarters there, despite the fact that rents are double that of Shanghai.

In fact, according to the closely followed Heritage/Wall Street Journal 2015 Index of Economic Freedom, Hong Kong has remained at the top of the heap, followed by Singapore, New Zealand, Australia, and Switzerland. The United States ranked No. 12, while China is in the “mostly unfree” category at No. 139.

In terms of growth and profitability, it matters a lot more where you do business rather than where your business is based. In this regard, Hong Kong companies have deep tentacles that reach into China and the dynamic Southeast Asian region.