Beware Of Emerging Markets, Hong Kong SFC Cautions

by Phillip Morton, Tax-News.com, Hong Kong

01 February 2007

Although Hong Kong is a relatively mature market in Asia, it still possesses some of the characteristics of an emerging market, and the Hang Seng Index generally has higher volatility than New York's or London's indices, the Hong Kong Securities and Futures Commission has warned.

In its latest Dr Wise column, the Commission observed that the city carries an increasing number of listed companies from emerging economies, with many of the emerging market's risks.

One of the most prominent risks at the moment is the exposure of listed companies to changes in the Mainland's economic policies, where the recent tightening of the collection of land appreciation taxes is a case in point.

Many emerging markets are still undergoing a significant evolution in many areas, such as market regulation and infrastructure, and reporting standards, which make them more unpredictable.

The commission said there are some causes for volatility in emerging markets such as unexpected market events, government intervention and speculative investment behaviour.

Investors tend to be more jumpy and will often trade on the slightest hint of trouble or rumours of bad news. Unpredictable government policies may also have a material impact on the markets.

Emerging market investments are also often less liquid than the developed ones. This is mainly because some emerging economies restrict fund repatriation by foreign investors, who are limited on the frequency and amount of investment and its withdrawal.

The Commission concluded by suggesting that as many emerging markets are still in the process of building accountability within the system, their legal and reporting framework may be either too lax or too zealous, and individual companies or industries may still be reliant on government support.

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