Bubble Watch for 2018: Four Risks MPF Members Should Not Ignore

2017 was a bull-market year by any measure: US stocks hit record after record, the Hang Seng Index climbed back above 30,000 — a ten-year high — and Hong Kong property prices kept rising, with the long-predicted correction still nowhere in sight. The question for 2018: does the rally continue, or does the market turn? Bulls and bears disagree.

The old wisdom says never try to call the bottom in a fall or the top in a rally — but it is cold at the top. Here are four risk factors that could shape the year ahead. Every MPF member should know them.

2017 in Review

Risk 1: The Mainland Factor

The heroes of this year’s Hong Kong rally were mainland-linked stocks, especially tech names. Mainland investors piled in through the Stock Connect southbound channel: HK$637.5 billion of net inflows over the past three years, and — according to Hong Kong Exchanges and Clearing — southbound money accounted for about 7 per cent of average daily turnover in the first ten months of this year.

Water can float a boat, but it can also sink it. Investors must watch mainland-related risks, above all rising mainland debt: Beijing’s deleveraging campaign is squeezing credit growth and tightening liquidity. How fast and how effectively those measures are implemented — and what shock they could deliver to the economy and financial markets — is the market’s biggest question mark.

Risk 2: Rising Interest Rates

The US Federal Reserve raised rates three times this year — in March, June and December. Hong Kong banks, flush with liquidity, have not followed: the prime rate stands at 5 per cent (small P) and 5.25 per cent (big P), unchanged since the end of 2008.

That can lull investors into ignoring the rate risk. But the Hong Kong Interbank Offered Rate (HIBOR) has been firming all year. November averages:

If the Hong Kong-US rate gap widens, or local funding demand rises, HIBOR will climb, squeezing banks’ funding costs and ultimately forcing prime rates higher. Investors should watch the broad impact of rising rates — on the economy, on markets, and on their own investments and debts.

Risk 3: Valuations

After this year’s surge, are Hong Kong and mainland equities — and individual sectors — reasonably valued, and is there further upside? That depends on the global growth outlook and corporate earnings. The mainland’s early-2018 economic data releases, and the March results season, will offer clues.

Property deserves extra caution. Home prices keep climbing, price indices keep hitting records, and affordability keeps deteriorating. Hong Kong Monetary Authority figures tell the story:

Both gauges have surpassed their 1997 peaks. The smell of a bubble is getting stronger.

Risk 4: Political Risk

The Korean Peninsula has been under the shadow of war, with tensions running high; after US President Donald Trump recognised Jerusalem as Israel’s capital, the Middle East outlook turned murky too. Markets are navigating rough waters, and these geopolitical flashpoints will keep tugging at investor sentiment through 2018.

What It Means for Members

The biggest myth is using “never call the top” as an excuse to skip risk management. Not calling the top is not the same as having no defences: understanding the risks and keeping room to manoeuvre in your portfolio is a different matter entirely.

Another myth is that a long investment horizon means ignoring near-term risks. Long-term does not mean blind: a rate-hike cycle, stretched valuations and rising geopolitical tension all shape the return path of the coming years. The prudent move in a rally is to keep the portfolio balanced — never bet everything on a single market.

Action List

• Check how much of your portfolio sits in Hong Kong equities and mainland-linked assets; avoid over-concentration
• Watch the rate signals: HIBOR trends and whether banks move prime rates
• Stay balanced and diversified against valuation and geopolitical risk
• Remember that 2017 was a bull-market year — managing risk in good times beats regretting it in bad ones