The index, which tracks the 100 most profitable blue-chips in the region, added a staggering 96.9 points, or 5.4%, to finish the session at 1,870.8. This means it is now up 14.4% year to date, although still 9.3% below its record close of 2,063 points from July 24.
The gains didnÆt come in isolation, but matched those in regional markets with several key indices rising more than 4% and Indonesia leading the pack with a 7% rally followed by Singapore with a 6.1% gain. The 5.9% jump in the Hang Seng Index and a 5.7% gain in the Kospi were of key importance given the heavy weighting of Hong Kong and Korean stocks in the FA100.
Aside from the rate cut and additional comments from the Federal Reserve that were interpreted as a signal that the US central bank is now more biased towards a cut in the Federal Funds rate too, Hong Kong was also supported by an announcement that Chinese individuals will be allowed to invest in Hong Kong stocks.
These two pieces of positive news helped reverse last weekÆs poor sentiment and sent the Hang Seng Index 1,208 points higher to a close of 21,595 points û which meant 40% of the past monthÆs decline (from a record close of 23,472 points on July 24) was recovered in just one day. YesterdayÆs gain was the largest since October 16, 1998 when the HSI surged 9% in a single session after the Federal Reserve announced a surprise 25bp cut in the Fed Funds rate in between its ordinary meetings for the first time in four years to prevent a potential liquidity crunch. The Kospi added 93.2 points yesterday in its biggest ever point gain to 1,731 points.
The rebound has to be viewed in the context of the recent sharp sell-off, however, and several analysts argue that equity markets are unlikely to be out of the woods just yet. If anything, yesterdayÆs bounce and the sharp turnaround in the Hong Kong market during FridayÆs trading session are yet more proof that equity markets are becoming increasingly volatile. One investment banker estimates that the Hong Kong stock market may well see another 10%-15% downside from current levels, but adds that he is also ôfully confident about the fundamental upsideö of the market.
Much of the decline in recent weeks has been the result of forced selling caused by a variety of factors such as margin calls, triggering of stop-loss levels and redemptions, while there has been no changes to the underlying fundamentals, he argues. The selling gained pace last Friday, when the Hang Seng Index was down as much as 6.2% in the mid-afternoon before reversing course and finishing with a more modest 1.4% loss.
ôI think the market still has to consolidate because it has been very volatile,ö agrees one analyst, who regards both FridayÆs sell-off and yesterdayÆs rebound as being overdone. ôI think things may come off again, because those who were brave enough to buy shares on Friday may actually choose to take profit (in the current rally). I still think we need to see a reduction in volatility before we can really say the market has turned the corner and found the bottom.ö
Observers had mixed views about how much actual impact the news of a pilot programme allowing Chinese individuals to buy Hong Kong-listed stocks actually had on the market, but everybody agreed that it was a positive signal. Most importantly, it shows that Beijing is encouraging further capital outflows and in the slightly longer term it should contribute to a narrowing of the valuation premium that A-shares command over H-shares, they say. (For further details on this announcement, see separate story on the FinanceAsia website).
The FA100 index was launched at a level of 918 in 2002, and crossed the 2,000 point mark for the first time on July 13 this year. It is composed of the 100 most profitable companies in Asia, and is by design a barometer of AsiaÆs financial markets. The index contains 17 mainland Chinese companies, 16 from Hong Kong, 15 from Taiwan and 24 from South Korea. There are also 10 companies from India.
The index, which is reconstituted each December (with the assistance of UBS), consists of the regionÆs 100 most profitable companies based on three years of aggregate earnings. This methodology is used in order to filter the most successful Asian blue-chip firms over what we consider a normal business cycle. The FinanceAsia 100 index is market capitalisation weighted.
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