Hong Kong must focus on fundamentals during market shocks: Barclays

However counter-intuitive it may seem.

As many investors start to head off to their summer holidays, Barclays described its framework for dealing with unexpected events could be useful, just in case of emergencies. It said in case of emergencies, it is advised to focus on fundamentals.

According to a research note from Barclays, as counter-intuitive as it may seem, it believes that it is at times of the biggest shocks that fundamentals matter most. It noted that over the past 17 years, it believes Hong Kong has experienced three major “shocks.”

For Barclays, there was the Asian Financial Crisis, SARS and the 2008 Credit Crisis. Clearly, it said, when each of these shocks occurred, there was no escaping the initial hit and property stock prices corrected significantly in the ensuing month.

The report noted that it is with the subsequent performance that the existing fundamentals helped to shape very different outcomes.

Here's more from Barclays:

To illustrate this point, we return to our usual affordability chart. Conceptually, we would argue that the shock from the 2008 Credit Crisis and the 1997 Asian Financial Crisis were equally big but what was very different was the housing affordability situation.

Back in 1997, Hong Kong’s home-price-to-income multiple was at 13.2x, well above the historical average of 8.7x. When the shock came, prices had to correct a long way before end-users could afford to step in and support the market.

The situation in 2008 was very different. Just before the Lehman bankruptcy, Hong Kong’s home price to income multiple was around 8.8x. While the Credit Crisis did cause a big shock and resulted in home prices falling 19% in 4Q 2008, this reduced Hong Kong’s home price to income multiple to only 7.0x, making housing 20% cheaper than its historical average.

As the shock passed, 2008’s 7.0x home price-to-income multiple set in place the condition for a very fast upturn, while the recovery from the Asian Crisis took six years.