If we look at Far Eastern financial markets today, the power axis has changed dramatically over the last 40 or 50 years. It is very easy to forget the heady heights of the 1980s and the booming Japanese stock market. Fast forward to today, and the situation is very different, but what does the future hold?

 

Japanese stock market

 

It was not so long ago that international traders awoke in the morning to see how the Japanese Nikkei index had performed overnight - before they gathered their thoughts ahead of the trading day. In hindsight, during the 1980s, we were watching the creation of one of the biggest asset bubbles the world has ever seen. Heavily influenced by the US government, we saw changes to the currency peg against the dollar and the lifting of regulatory and investment restrictions.

 

The country has since experienced long bouts of deflation, subdued economic growth and a limited increase in corporate profitability. Since the 1980s, these three stats put the situation into context:-

 

• Between 1997 and 2017, Japanese GDP growth increased by just 2.6%, an annualised growth rate of 0.13% per annum
• The Nikkei 225 index stood at 26,477 on 2 May 1991, compared to just 27,901 today (9 December 2022)
• In 1987, Japanese stocks were valued at $4 trillion, which equated to nearly 50% of combined world equity markets at the time

 

During this period, the financial system has been severely compromised. The economy now stands on the edge of a recession, and the previous TINA mindset has gone. TINA was an acronym for "there is no alternative", which in this case related to stock market investment during the 80s.

 

Hong Kong stock market

 

Since Hong Kong returned to the Chinese fold on 1 July 1997, the international influence and presence of the Hong Kong stock market have increased dramatically. While the Hong Kong economy has suffered like other developed country in light of Covid and the ongoing cost of living crisis, the long-term trend is still pointing towards significant growth. The leading Hang Seng index stood at 3737 on 3 May 1991 and today stands at 19,900 - colossal growth compared to a stagnant Nikkei 225 index. 

 

The Chinese government has been highly proactive concerning the Hong Kong stock exchange, creating a link between mainland China and international investors. This has placed the Hong Kong market front and centre in the APAC/Far Eastern region, a trend that will likely strengthen in the short, medium and longer term.

 

Chinese stock market

 

As we mentioned above, the Chinese authorities are working very closely with their Hong Kong counterparts to reduce restrictions on overseas investment in China. In addition, the introduction of the "Connect" trading system means that many leading Chinese companies have dual listings in China and Hong Kong. This allows international investors to gain exposure to Chinese companies and the broader economy and has opened a gateway to raise funds via international investors.

 

We know that plans are afoot to extend and expand the "Connect" stock dealing service, which now incorporates an array of other investment assets. There is no doubt that China and Hong Kong's global influence has increased dramatically in recent years. However, many experts believe we are literally just scratching the surface of the long-term potential.

 

Summary

 

Comparing the demise of the Japanese stock market against the growing influence of the Chinese/Hong Kong financial sector is akin to comparing day and night. So it will be interesting to see how the future pans out.

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