Hong Kong's Stocks: Now Cheaper Than Pakistan's

Islamabad or bust: HK stocks can now be bought more cheaply than Pakistan's.

Having a powerful economy in your orbit, Big Brother style, has its benefits and drawbacks. For the longest time, the Hong Kong Stock Exchange (HKSE) has benefited from riding China's slipstream: Late last year, mainland China overtook Japan in terms of market capitalization to become the second-largest stock market in the world. Then, with the Chinese stock market gathering momentum, Hong Kong's was poised to become the third largest stock exchange after the mainland's.

However, you know what has transpired since: the PRC-inflated stock market bubble has popped to dramatic effect, causing turmoil in financial markets the world over. Nowhere has this turmoil been felt more than in Hong Kong. After being tipped to overtake Japan, Hong Kong's stock market has dropped so much that its average price-to-earnings (P/E) ratio has fallen below that of, er, Pakistan. You read that right--Pakistan of chronic Taliban insurgency, political instability, and balance of payments crises:

The benchmark gauge for $4.3 trillion of shares was valued at 9.8 times reported earnings on Thursday, a 44 percent discount to the MSCI All-Country World Index. That’s the cheapest level among developed markets worldwide and compares with a multiple of 10.2 for Pakistan’s KSE 100 Index. Russia’s Micex has the lowest valuation among major markets, trading at about 9.5 times profits.

Partly, the low valuations are due to the  HKSE being loaded with financial stocks that don't trade at exceptionally high P/E ratios unlike, say, technology or biotech stocks:

“This is really the time to buy from a long-term investor’s perspective,” said Rahul Chadha, co-chief investment officer at Mirae Asset Global Investments in Hong Kong. “You’re not seeing a hard landing in China. In the next couple of quarters as you see the economy stabilize at lower levels, people will take a fresh look at the market.”

The Hang Seng measure’s 46 percent weighting in financial stocks, which tend to trade at low price-to-earnings ratios, may make the market appear cheaper than it really is. While China Construction Bank Corp. is valued at 5.3 times earnings as of Thursday in Hong Kong, the median multiple of shares on the city’s exchange is 11.5. That’s 17 percent higher than the index.

What more can I add? Mainland China giveth; mainland China taketh away. One day your market capitalization is about to exceed Japan's, stock the next day your stocks are priced more cheaply than Pakistan's.