Worst CNY start for HK stocks since 1994

Hong Kong

HONG Kong stocks fell on Thursday in their worst start to a Chinese New Year since 1994 as a global equity rout deepened amid concern over the strength of the world economy.

The Hang Seng Index slumped 3.9 per cent at the close in Hong Kong as markets reopened following a three-day trading closure, during which the MSCI All-Country World Index dropped 2.1 per cent. The last time the gauge fell so much on the first working day of the Chinese New Year, investors were worried about the health of former Chinese leader Deng Xiaoping.

Lenovo Group Ltd led declines while energy companies dropped after crude slumped 11 per cent during the holidays. Jeweller Chow Sang Sang Holdings International Ltd slid after riots in the Mong Kok district.

Hong Kong's benchmark equity gauge tumbled 12 per cent this year through last Friday amid concern that capital outflows, a slumping property market and China's economic slowdown will hurt earnings. Tuesday's violence in the shopping district of Mong Kok threatens to deter mainland visitors and worsen a drop in retail sales, according to UOB Kay Hian (Hong Kong) Ltd.

"You can't avoid a drop because everywhere has come down so much during this time and the same concerns are still there - oil price, global recession," said Steven Leung, an executive director for institutional sales at UOB Kay Hian. "The image of Hong Kong as a metropolitan city has been hurt quite seriously" by the rioting, he said.

PetroChina Co tumbled 5.1 per cent, while CNOOC Ltd, China's largest offshore oil company, dropped 5.3 per cent. HSBC Holdings Plc slid 5.4 per cent to a six-year low. The Hang Seng China Enterprises Index retreated 4.9 per cent, its biggest loss since August. Mainland financial markets remain closed for holidays until next Monday.

Plunges in crude and concerns over the perceived creditworthiness of European banks has fuelled uncertainty over the strength of the world economy this week. Oil fell below US$27 a barrel in New York, compared with US$31.72 a barrel at the close on Feb 4. Kyle Bass, the hedge fund manager who successfully bet against mortgages during the subprime crisis, said China's banking system may see losses of more than four times those suffered by US banks during the last crisis.

"The general tone of other markets has been quite soft," said Tony Hann, who helps oversee about US$270 million as head of equities at Blackfriars Asset Management in London. "It's difficult to be optimistic" about Hong Kong, he said.

The Hang Seng Index's price-to-book ratio fell below one last month for the first time since the Asian financial crisis roiled regional markets and popped a domestic property bubble in 1998. All but one stock on the 50-member gauge are down this year.

Chow Sang Sang dropped 0.9 per cent, while Luk Fook Holdings (International) Ltd, a jeweller that gets more than half its revenue in the city, declined 4.7 per cent.

While investor attention may shift towards corporate profits as companies unveil quarterly and annual results, analysts see little scope for optimism. They're predicting a 12 per cent drop in the Hang Seng Index's earnings per share over the next 12 months, according to data compiled by Bloomberg. BLOOMBERG