Be wise as hot money floods markets

Editorial | Mary Ma 17 Feb 2021

Japan's Nikkei index topped the 30,000 level to hit the highest mark in three decades.

The last time Japanese stocks were at this level was back in 1990, when the asset-inflated bubble burst to open an extended period of deflation.

It's small wonder Japanese investors marked the milestone with sips of sake.

They have waited a long time for this moment.

The signing of the Plaza Accord by five countries in New York in 1985 to allow intervention to depreciate the US dollar against the Japanese yen and German Deutsche mark led to unprecedented asset bubbles in Japan.

These burst several years later, and it has been a struggle ever since for the country to live with its stagnated economy.

There is also speculation that the US will be the next economy after Japan to brace for a burst that ushers in a new period of stagnation as a result of the bubble expanding in Wall Street following numerous rounds of quantitative easing.

On Monday, the Nikkei was back to where it was some 30 years ago, spurred by excessive liquidity in the markets.

Tokyo is not the only major stock market defying the Covid pandemic to buck the doldrums.

Hong Kong has recaptured the 30,000-mark milestone thanks to a continuous influx of capital from the north, right?

No country has been spared by the pandemic, which has infected more than 100 million people globally.

Japan's economy contracted by just under 5 percent, while Hong Kong sank about 6 percent. The US plunged by more than 4 percent and the UK by nearly 10 percent.

But all except London's FTSE thrived in open defiance of the economic pattern.

They are being driven by too much hot money in circulation.

As investors put aside the Covid blues to live in a temporary escape from reality for a bite of the market feast, it becomes all the more essential to remain prudent.

For sure, the GameStop gold rush was symptomatic of a bubble. When nearly everyone you know starts talking about making daily gains from the market, it is also common sense to exercise caution.

The Hong Kong stock market is subject to the impact of at least four factors:

One, China - both the country's policy and state of economy matter.

Two, the monetary policies of central banks internationally. When will they begin unwinding quantitative easing?

Three, the pandemic, obviously. How will the crisis unfold? Are the vaccines effective on the coronavirus variants too?

Then, of course, there's the inflow of mainland capital.

Since Joe Biden was sworn into office, he has not yet lowered the sanctions imposed by Donald Trump on Hong Kong following the imposition of the national security law and arrests of pro-democracy activists and young people.

Mainland capital has provided a major support to the market and the clock is unlikely to strike 12 midnight soon.

But as the dance carries on, investors must stay awake.

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