Could Asia turn into a bubble? :: HSBC

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Many investors asked us about the risk of a
bubble in Asia (and, to an extent, in other
emerging markets such as Brazil and Turkey),
with authorities keeping rates too low because
they fear their currencies appreciating, and capital
inflows pushing up asset prices.
Certainly the probability of a bubble is rising.
HSBC’s Asian economist Frederic Neumann has
written about this extensively (see, for example,
The Anatomy of Bubbles¸21 October). However,
from an equity strategist’s point of view it seems
more of an opportunity than a risk – at least in the
bubble’s early stages, before it all ends in tears.
Some of the indicators recently do suggest that the
bubble is beginning to build quickly. Flows into
Asian equities have accelerated dramatically
recently. Asia (ex Japan), for example, has seen
USD26bn of inflows since the start of September,
compared to USD23bn in the entire January-
August period (Chart 7). Some of this may have
been triggered by the risk of countries’ imposing
controls on inflows (about which, more next):
investors are accelerating purchases before the
cost of entry rises. Several fund managers during
our marketing told us that this is what they have
been doing.


We have also noticed a sharp pick-up in loan
growth in Hong Kong recently (Chart 8). Bank
lending was still shrinking at the start of 2010; by
August it was growing 24% y-o-y. There may
have been some substitution effect, as companies
from the mainland raised funds in Hong Kong to
offset restrictions on Chinese bank lending. But
there does also seem to have been a sharp rise in
lending both for mortgages and to SMEs. With
short-term rates close to zero (one-month Hibor is
0.24%), China booming and the property market
hitting new highs (prices have risen 45% since the
trough, and luxury residential property is 14%
above the 1997 peak), it is not surprising that
credit growth is so strong.


But this “bubble” could have a long way further to
go. As mentioned above, stock market valuations
are far from stretched. While property prices in
most countries are expensive, stock prices on
aggregate are not. Only recently – even in Hong
Kong – have retail investors started to show
interest in equities. Outside Hong Kong, loan
growth remains weak (2% in Korea, 8% in
Singapore, 6% in Taiwan, 14% in India). Inflation
is not yet a risk – and has generally surprised on
the downside this year.
This could all change over the coming year.
Monetary authorities will have difficult decisions
to take – and are likely to err on the side of
allowing policy to be too easy. Recent rises in
food prices globally could push up inflation in
Asia. But, for the moment, we see nothing that
will burst the bubble. Investors should enjoy it
while they can.