Hong Kong Stocks at Cheapest in Decade Lure Investors

By Michael Patterson and Michael Tsang

Oct. 28 (Bloomberg) -- Hong Kong's Hang Seng Index yesterday tumbled to its lowest valuation since the Asian financial crisis a decade ago after posting the worst performance this month among the 10 biggest equity markets.

The Hang Seng's 13 percent drop yesterday pushed its October decline to 39 percent and cut the index's price relative to net assets to 1.05, the lowest since September 1998. The slump is prompting Sentinel Asset Management and TCW Group, which together oversee more than $130 billion, to add to holdings in Hong Kong. The Hang Seng rallied 14 percent today.

``In the long-run, buying into this kind of forced liquidation, this kind of panic, this kind of fear, is going to make you money,'' said Kate Schapiro, a San Francisco-based international equity manager at Sentinel, which oversees $17 billion. ``We're not committing all the money on one day, but cautiously and bit by bit.''

The 42-company Hang Seng, down 60 percent from its peak a year ago, dropped as much as 15 percent yesterday, which would have been the biggest retreat since the 1989 Tiananmen Square crackdown in Beijing, as a jump in money-market rates by the most in a month heightened concern the credit crisis will ravage the city's banks and real-estate companies.

The last time the Hang Seng was as cheap on a price-to-book basis, the index rallied 76 percent over the next year.

Banks, Property Stocks

Hong Kong, a special administrative region of China since 1997, is home to the biggest market for Chinese shares that can be freely traded by foreigners.

Industrial & Commercial Bank of China Ltd., the world's biggest bank by market value, surged 16 percent today in Hong Kong trading today. The stock slumped 11 percent yesterday to the lowest level since the initial public offering two years ago, which left the shares trading at 7.98 times earnings and 1.5 times book value, the cheapest levels on record.

Cheung Kong (Holdings) Ltd., the property developer whose chairman is billionaire Li Ka-shing, traded for 0.6 times book value yesterday, the lowest level since April 2003. The shares jumped 17 percent today, following a four-day, 22 percent drop.

Equities tumbled around the world this month, wiping out more than $12 trillion of market value, as a seizure in money markets sparked by $678 billion of asset writedowns and credit losses at banks spurred concern the global economy is headed for a recession. The MSCI Asia Pacific Index tumbled 27 percent since the end of September.

Hayes Miller, the Boston-based global equities portfolio manager at Baring Asset Management, said he isn't ready to add to holdings in Hong Kong because earnings estimates in the region may prove too optimistic given the slowdown in the economy and slump in the commercial real-estate market.

`Just Too Early'

Hong Kong's economy may expand 3.5 percent next year, the slowest pace since 2003, according to estimates by the Washington-based International Monetary Fund.

``We've been more defensive,'' said Miller, who helps oversee about $40 billion. ``We're waiting to buy back into emerging markets and buy back into Southeast Asia when we think the time is right. It's just too early.''

Hong Kong's benchmark last traded at 1.05 times book value after Thailand's devaluation in 1997 sparked a plunge in currencies around the region and pushed companies saddled with billions in dollar-denominated debt into bankruptcy. The Hang Seng surged over the next year, beating the total return on the MSCI Asia Pacific Index by 7.7 percentage points.

Even after today's gain, the Hang Seng has the second- lowest price-to-book ratio among benchmarks in the 10 largest equity markets behind only Japan's Nikkei 225 Stock Average. The Hong Kong measure trades for 7.7 times the reported earnings of companies in the index, also the second-lowest ratio among the biggest markets.

``Once the debt crisis ends, there's going to be economic growth,'' said Komal Sri-Kumar, the Los Angeles-based chief global strategist at TCW Group, which oversees $118 billion. ``And you're buying the Hang Seng at one-third its valuation a year ago. I'm not saying from here we are going to boom, but I can't see things getting much worse than this.''

Sri-Kumar, who said he's been ``bearish'' on Hong Kong for the past year, now sees ``attractive value'' in the market after this month's plunge.

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Michael Tsang in New York at mtsang1@bloomberg.net.