The Hang Seng index jumped 26% in just over 26 days. The reason: Beijing now grants Chinese citizens access to the Hong Kong stock market. Twenty-six percent in just over a month… They call this move the "train to HK stocks."
This market has room to run. Here's why.
1) The Federal Reserve: The Fed cut the interest rate 50 basis points. Remember, the Hong Kong dollar remains pegged to the greenback. This means Hong Kong dollar interest rates are closely tied to U.S. rates. A rate cut here should bode well for Hong Kong property stocks.
2) Asian Development: The bank reports that Asia can now weather a slowdown in the U.S. A U.S. recession coupled with a 10% slide in the dollar would cut growth by only 2 percentage points.
3) Americans Are Broke: Here's a clip from the front-page article "World Economy in Flux as America Downshifts" in the Wall Street Journal. I strongly suggest you give this a look. It's insightful, well written and to the point.
"The forces that had been supportive to excess consumption for a decade are now headed
the other way, and the U.S. consumer just can't keep driving…America's current account deficit to higher highs," says Morgan Stanley's Stephen Roach. The U.S. share of global imports has fallen to14.3%, the lowest since the recession of 1991-1992, according to IMF data. In 2000, the U.S. soaked up 18% of U.S. imports. By contrast, Brazil, South America, India and other developing countries now account for 40.1% of global imports,
up from 28.4% in 1994 "Meaning we're not the sole market of last resort."
Economic independence from the American consumer… Check.
4) Evading the Estate Tax: Money will flow where it's treated best. You won't find any other place that treats money better than Hong Kong. The highest tax bracket comes in at 17%. Individuals are assessed only on annual
employment income. Dividends and capital gains are not taxed. And like many progressive tax systems, Hong Kong grants allowances for certain deductions like charitable contributions. When you consider Hong Kong provides arguably the world's greatest municipal services in a relatively crime-free environment, you'll be hard-pressed to find a more favorable tax policy anywhere in the world. In a similar fashion to low personal tax rates, Hong Kong's estate tax holds a maximum rate of 15% on assets exceeding US$1,350,000. So when Li Ka-shing, the
world's 10th richest man, looks to pass his $18.8 billion and growing, he'll do so under
very favorable circumstances. And here's the kicker. Hong Kong recently repealed its inheritance tax on property.
Consequently, many Hong Kong property owners are now able to pass down real estate assets without any tax liability whatsoever. (Unfortunately, U.S. citizens who own Hong Kong property are still taxed under inheritance laws.) Real estate assets may be passed down generations without any tax liability whatsoever.
It's no wonder 21 billionaires call Hong Kong home. I would venture to guess that it won't be long before many more do the same.
Hong Kong will become a tax haven for the new class of super rich. Its skyline competes with Manhattan's, its weather compares with Miami's, its public safety and infrastructure outclass anything you'll see here in the United States. Disney has just moved in across the harbor on Lantau Island, and Macau, the Las Vegas of Asia, is just a 45-minute boat ride away. What's not to love?Prime locations in Central, Admiralty and Causeway Bay, the heart of Hong Kong, will only continue to command premium prices for years to come. And that's just one of the reasons we're so bullish on Hong Kong property development stocks over the long term.
5) Too Much, Too Fast: Beijing announced that it would place a quota on the total amount of money that could flow from China to the Hong Kong stock market. It seems money has been pouring in. The move intended to drain liquidity from the Chinese economy has worked well. It's worked too well. Chinese securities regulators want to ensure the stability of domestic markets. So they capped the total amount. It's encouraging that Chinese investors reacted so strongly.
We're encouraged Beijing actively supports Hong Kong.

More Tomorrow.