HKHSI and NASDAQ Downturn (5/5/2000)

Major Correction in the Horizon (4/15/2000)

Prof. Kai Keung Mark is a retired professor, Dept. of Biology, The Chinese University of Hong Kong and Dept. Head and Principal Lecturer, Dept. of Science, Hong Kong Institute of Education. He has three biotechnology patents. He uses his understanding of high technology to forecast market movements . He has published 13 articles in Financial Trend, and leading Hong Kong stock analysis journal plus many other Mark's letters since 1987. His prediction reliability rate reached 80%. He accurately predicted the October crash (10/18/87), the bottom level of 1990(3/5/90), the peak level of 1994 (5/11/92), the peak level of 1997 (2/12/96), the peak level of 2,000 (8/22/99), the peak in March 2000 (2/20/2000), the bottom in September, 2001, the US bottom in 2003 (5/28/2003), the HK bottom in 2003 (6/13/2003), the US peak in 2007 (11/14/2007), and the HK peak in 2007 (1/9/2008).

The Red Chip Bubble Will Burst

The investment atmosphere in Hong Kong is not only influenced by the US/western market sentiment alone, but also significantly dominated by the big dragon, the buying frenzy in China (see my article of 4/28/2001). The Chinese stock market frenzy is built up by 7-8% economic growth in the last few years, resulting in consistent rise in stock price and a general impression that if one buy stocks, one usually will make big gains. When there are considerable wealth already built up, this perception easily create a stock market frenzy. Being at the third up move is already quite risky, it was further fueled by the availability of B shares to the Chinese domestic investors. The price of A shares are several fold higher than the B shares. B shares are the same as the A shares initially, but are designed for international investors. They are not very popular resulting in a price gap between A and B shares for the same company. This results in sky rocketing of the B share prices. Now the price between A and B shares are close to equilibrium and there is not much opportunity to push up the B shares with respect to the corresponding A shares. However, the buying frenzy still exists. The attention has turned to the red chips and H shares in Hong Kong stock market. There is a big gap between the average PE of the A and B shares in China (see Shanghai index and Shenzhen index) and that of the red chips and H shares in HK.

The Chinese stocks have an average P/E of around 50. while;e the average P/E for red chips and H shares is around 10 before the recent rise. So, it is quite obvious for investors to sell the Chinese stocks and buy red chips and H shares which both are Chinese base stocks. This has now again created a buy frenzy in HK. Herd psychology is not very logical. Success breeds the illusive confidence, and confidence allows one to accept higher stock prices. This is the classical pattern in creating stock market frenzies or bubbles, which appeared throughout world economic history. Such stock market frenzy usually lead to:

1. unreasonably high stock prices;
2. very rapid rise in stock price;
3. many small or bad stocks shoot up like a rocket;
4. very high trading volume;
5. many IPO and secondary offers (already occurred to some red chip stocks).

I now have described both the excellent opportunities in the short term, as well as the serious danger of market collapse that will eventually come within this year. My advice to you as well as to myself is: be alert for the coming storm; be contented with several-fold gain and get out in time. Guard against losing all your gain the last round. Good luck!