Rapaport Magazine

Hong Kong Market Report

Roller Coaster of Speculation

By Gaston D’Aquino
RAPAPORT...Hong Kong’s stock market shed 3.7 percent of its value on the twentieth anniversary of Black Monday, compared to the 45.8 percent plunge it took as part of the 1987 worldwide financial crash. But this time, within a week, not only were Hong Kong’s losses reversed, but the local stock index hit an all-time high of more than 31,500. The resulting euphoria negated all warnings that the economic run-up was a bubble just waiting to burst.

Turbulent days of roller-coaster highs and lows followed, but the market held an even keel and seemed to be weathering the storm. Even Chinese Premier Wen Jiabao’s announcement that the much-touted through-train — which would allow Mainland Chinese investors to buy Hong Kong shares — would be delayed until sometime next year did not have too much of an impact. The premier further announced that the government would take direct action to address the rampant speculation that is fueling inflation of basic necessities.

At the same time the local market was climbing, the value of the U.S. dollar was heading south. In response, the Chinese government said it was considering a diversification of its colossal U.S. dollar foreign exchange reserves to other stronger currencies.

In an attempt to eliminate some of the speculation that is driving the market, the government next cracked down on underground exchange dealers in China, who have been funneling illegal remittances to Hong Kong to invest in the stock markets. That dried up a significant source of funds that had been flowing in and set the market on a downward slide, sending the market down by 18 percent from its record high.
What is happening is that the equity markets are out of control and moving purely on rumor and speculation. Even governmental interventions to adjust interest rates are no longer having an impact.

Déjà Vu
As for the diamond business, despite the harsh lessons that should have been learned in the early 1980s, it is in a period which is almost déjà vu. Oil prices have reached $100 a barrel, the forerunner of rampant inflation, which erodes spending power as the cost for necessities escalates.

Gold is nearing $850, which will make jewelry much more expensive to produce. Diamond debt is at an all-time high and undigested diamonds are in the pipeline, yet rampant speculation in the trade is driving up prices. Rough is being hoarded and pieced out in dribbles at inflated prices.

For the moment, demand is high as money made in the stock markets goes looking for diamonds, but a closer look tells us the real demand is only for specific ranges of sizes and qualities.
The question the industry is asking is whether things will be different this time around. If there should be a downturn, will the huge financial losses be absorbed by the trade and will the industry be able to maintain diamond prices at these elevated levels? Will consumers be more forgiving this time if the diamonds they own go down in value? It took consumers 20 years to get over the last downturn — a whole new generation of diamond buyers had to be born.

Undoubtedly, there are many new and innovative marketing vehicles, such as internet selling, which have widened the selling platforms, but not everyone is keen to adopt anything new.
Diamantaires fear that if internet diamond trading becomes a reality in Hong Kong, they will lose the tentative hold they currently have, a hold that already has been weakened by the invasion of foreign diamond companies setting up offices in Hong Kong.

Changes are inevitable, and diamantaires have in the short span of the past 20 or 30 years seen a complete destruction of their trade’s structured distribution system and a transition to the frenzied hustle that exists today. Many have adjusted and survived, but others are no longer in the business. What has happened to the industry — short-term and long-term — and what will happen in the future deserve serious reflection.
Christmas Hopes

The Christmas period will undoubtedly have an impact on how much inventory can be shifted in the diamond pipeline. Although early signs of renewed consumer spending are encouraging, the industry will have to wait until early January to get the complete picture since goods placed on memo over the holiday season have to be finalized then.

At best, it can be said that the situation is skittish as there are many worries still hanging out there that will not be resolved just because it is Christmas — the time of cheer and good will. But we can always hope that at least they will not dampen the holiday spirit too much.

The Marketplace
• Large-stone demand is extremely strong and 5 carats and larger in fine goods are difficult to locate, with prices very firm.
• Prices for 1-carat size are stronger in high clarity and high colors. Resistance to prices is balanced by the shortage in desirable goods.
• Buyers are still picky but willing to consider less desirable goods if on memo.
• Small sizes for jewelry manufacturing are still moving well. Supplies should resume to normal after the Diwali holidays.

Article from the Rapaport Magazine - December 2007. To subscribe click here.

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