Hong Kong’s economy contracted sharply in the third quarter as it entered a recession. Third-quarter gross domestic product retreated 3.2% from the previous three months, after a 0.4% contraction in the second quarter. Two consecutive periods of negative growth mean Hong Kong has fallen into a technical recession. The economic debate now is focused on how long the downturn will last, and if the U.S.-China trade war and the demonstrations have done lasting damage. 

The Hong Kong Monetary Authority cut its benchmark interest rate Thursday, in line with the city’s currency peg to the dollar following the U.S. Federal Reserve’s reduction in borrowing costs. The move is unlikely to have much bearing on the local cost of borrowing, as lenders don’t necessarily pass on the rate to the public. One of the biggest factors in determining if Hong Kong will recover — and how soon — is whether mainland Chinese tourists scared away by the protests will return. Mainland visitors still account for almost 80% of total arrivals in Hong Kong.

“It seems that it is extremely difficult to achieve the forecast” of 0%-1% growth for the year, and GDP may very well decline in 2019, Financial Secretary Paul Chan confessed.

Future Wealth’s View

Turmoil in Hong Kong, Brexit woes in Europe coupled with hyperinflation in Venezuela are some of the main reasons, the stock market in the US, continue to see major inflows of money and consequently hit new highs despite the lofty valuations in US equities, prospect of an economic  slowdown and mixed Q3 earnings reports from US Corporations.

In many ways, US markets represent the best of the worst and investors are pouring money into US ETFs, corporate bonds and Mutual funds. Consequently, it has become a self-fullfilling prophecy that because the US markets are hitting record highs, the US economy must be robust and so more money comes into US markets and the cycle continues.

We, at Future Wealth, continue to believe that staying in defensive, high dividend paying companies is the most judicious strategy at this time. Finding joy in and benefitting from other people’s misfortune is never advisable and is not an investment strategy.