The market crashes! The market takes off! Where will the market go? All possible headlines reacting to stock market behaviour, but what does it mean and how is it measured?

The financial press keeps us informed on stock market movements on a daily basis, and also electronically in real-time. Individual stock prices are closely followed by investors, often leading to knee-jerk reactions to buy or sell. While various stocks can move in different directions at the same time, overall, stock market values either move up or down. Occasionally, they do not even move and remain steady.

In appreciating what moves entire stock markets, we need to understand the tools used to measure market performance – indices. Each stock market will report its performance using an index, and in some cases, more than one.

To explore the reasons why markets can move in unison, egging each other on and, at other times, unilaterally, we will consider three markets: Hong Kong, New York and London, with special emphasis on Hong Kong. For Hong Kong, we will monitor the Hang Seng Index, for New York the Dow Jones Industrial Average and for London the FTSE 100.

Key Indices

Looking at events over the last 30 plus years will help us understand why markets moved in the way they did. Specifically, we will look at: the events surrounding Black Monday 1987, when markets were in lockstep; August 1998 when Hong Kong was out on its own dealing with overpowering speculator attacks; and the contrast between SARS in 2003 and the Global Financial Crisis in 2008.

Out of the three markets, Hong Kong is very much the youngest, although it has had to grow up quickly. The history of the Hong Kong Stock Exchange is relatively short compared to those of New York and London.

The History of the Hong Kong Stock Exchange

The first formal stock exchange was created in 1891 with the formation of the Association of Stockbrokers in Hong Kong. The name was changed to the Hong Kong Stock Exchange in 1914 with a non-Chinese membership, reflecting the ever-present British colonial influence.

In 1921, a second exchange, the Hong Kong Stockbrokers’ Association, was formed with an all-Chinese membership. In 1947, after the Second World War, these two bodies were merged to create the new Hong Kong Stock Exchange.

Rapid economic growth led to the establishment of three more market-driven stock exchanges.

1969 Far East Exchange
1971 Kam Ngan Stock Exchange
1972 Kowloon Stock Exchange

As noted by Hong Kong Securities and Investment Institute in its licensing examination study material for Paper 1, the market was planning to open several more exchanges by 1973. Given the lack of control over the activities of these exchanges, the government enacted the Stock Exchange Control Ordinance in February 1973 banning the opening of any more exchanges.

The operation of four stock exchanges lasted until 1986, when, in an attempt to strengthen market regulation, all four were unified to create the Stock Exchange of Hong Kong Limited (HKSE). Trading of the new exchange started on 2 April 1986 using a new computer-assisted system.

After the dramas of Black Monday 1987, there were calls for a reformation of the Hong Kong securities industry, which resulted in two major developments. In 1989, both the Hong Kong Securities Clearing Company was created to introduce a central clearing and settlement system (CCASS) for securities transactions and the Securities and Futures Commission (SFC) was established as the single statutory markets regulator.

Finally, the Hong Kong Exchanges and Clearing Limited was created in 2000 with the merger of the HKSE, the Hong Kong Securities Clearing Company and the Hong Kong Futures Exchange (HKFE).

A man outside of the Royal Exchange after the economic impact brought by Black Monday.
(Source: Hulton Archive, Getty Images)

Ian Hay Davison, senior partner of a UK accountancy firm, was appointed to investigate why Hong Kong’s market was unable to deal with the heavy selling pressure. His findings exposed a lack of systemic stability, where one broker defaulting could result in a domino effect. There were also issues with market manipulation and deception.

Davison delivered a set of recommendations to the HKSAR Government in May 1988, which led to the creation of the Securities and Futures Commission (SFC), one of Hong Kong’s leading financial regulators.

Interview of Ronald Li, the Chairman of the Hong Kong Stock Exchange, after the crash.
(Source: South China Morning Post)

Many of today’s business graduates who are starting their Hong Kong financial market careers were not alive in 1987. During their licensing exam studies, they learn about the origins of the SFC without appreciating the events of Black Monday.

New York stock market prices fell significantly on the Thursday and Friday of the previous week, and the London stock market fell 5% on the Friday. In the U.K., the weekend press speculated whether or not prices would keep falling. They did. The global crash started in Hong Kong the next Monday morning and was followed by even deeper falls in London and New York — 11% and 23% respectively.

While a variety of stock investors were desperately trying to make sense of Black Monday’s market mayhem, the leaders of Hong Kong’s professional firms found themselves on the front-line, advising and protecting clients, while also steering their firms on a steady path through the chaos and confusion.

Stuart Leckie, 77, remembers a feeling of despair around town in the weeks following Black Monday. An actuarial consultant from Scotland, Leckie recalls clients asking if they should sell, hold or even buy. His advice focused on the long term, telling clients “do nothing, let’s see how things unfold.” His advice turned out to be sound. As he points out, “$100 invested in the Hong Kong market at the beginning of 1987 was worth around $105 at the end of the year.”

Source: Stuart Leckie

Sadly, investors who had borrowed money from brokers to buy stocks as they climbed in price, discovered that when prices reversed, brokers wanted their money back. Small investors with limited resources had to sell stocks at a significant loss to pay the brokers’ margin calls.

Dire impacts of the Black Monday event makes the frontpage. (Source: South China Morning Post)

David Lindsay, 67, a chartered surveyor from England, had invested in a selection of Hong Kong stocks prior to the crash. His investment was partly financed by a loan from his broker, a practice known as margin financing. When prices started to fall, his broker asked for the loan to be repaid. Lindsay did not have that sort of money and decided to sell his entire holding when the stock exchange finally reopened. He realised a loss of over $30,000.

“I felt pretty depressed for a while and a bit stupid,” he said.

Lindsay remembers that “everyone was in shock. It was a weird time.” Lindsay’s investment activities took a break for over five years to allow his Black Monday wounds to heal.

Traders read news about collapse of the global stock markets. (Source: Bettmann,GettyImages)

It was a different situation for Allan Zeman, 73, an entrepreneur who started in trading before moving into Lan Kwai Fong property. A canny investor, Zeman was wary of the stock market. “It was more of a casino back then. People invested on the basis of a company’s stock number. Very unsophisticated.” As the stock market fell, so did the property market and Zeman saw investment opportunities opening up.

“My entry into the Lan Kwai Fong property market was enabled by the Black Monday aftermath,” he said.

Frontpage report of the economic casualty brought by Black Monday. (Source: The New York Times)

Some professional services firms found business opportunities in the wreckage. Brian Stevenson, 77, was managing partner of an international accountancy firm. He recalls partner meetings when they analysed ways of helping clients navigate through the business challenges and, naturally, there was an increase in demand for liquidation services.

As Stevenson noted, there were opportunities in the Hong Kong property market, with property bargains popping up in Hong Lok Yuen.

Hong Lok Yuen is a low-density luxury residential housing estate in Tai Po and was developed between 1980 and 1993. In late 1987, Stevenson thought the stand-alone houses with their own gardens were selling at bargain prices. He told his partners about his discovery and three of them bought houses.

“As long as you are financially prudent, a crisis can present real opportunities,” he said.

This sentiment is emphasised by Roger Nissim, author of the 2020 book “The First Estates: The Story of Fairview Park and Hong Lok Yuen with Documents”. Nissim, 77 and a 50-year veteran of Hong Kong, chronicles the price movements in Hong Lok Yuen houses from 1983 to the present day. He shows that a 3,500 square foot residence that cost HK$1.9m in 1983 rose to HK$2.5m in 1987, but he concedes that market transactions post October 1987 fell way below the developer asking prices.

“When there’s blood on the streets, that’s the time to buy. Someone who can’t pay the mortgage, will sell low,” he said.

In 2023, those same residences were selling for HK$50m.

Source: Simeng Xu

A pre-cursor to the COVID-19 pandemic, which lasted from 2020 to 2022, was the Severe Acute Respiratory Syndrome, known as SARS, that hit Hong Kong in March 2003. Although SARS reached other countries, Hong Kong was by far the worst affected. As stated in the Journal of the Royal Society of Medicine, there were 1,750 cases identified between 11 March to 6 June along with 286 associated deaths. Although no lockdowns were imposed, few people travelled in and out of the city.

One of the SARS casualties was the stock market, which fell 5.5% in March 2003, while London, unaffected by SARS, fell 1.2%. Meanwhile, New York actually rose 1.3%.

Followed by the first confirmed SARS case in Hong Kong in Feb. 2003, Hang Seng index recessed in March, while SARS did not cause economic impact in New York. (Source: TradingView)

On the other hand, all stock markets were similarly affected by the Global Financial Crisis (GFC) between mid 2007 and early 2009. The GFC was the result of a downturn in the US housing market which, in turn, led to many banks worldwide incurring large losses, with government bailouts required to avoid bankruptcies. The markets reacted in unison. From early November 2007 to February 2009, the Hang Seng Index fell 60%, the US market 49% and the UK market 43%. All three markets recorded their lowest prices at the end of February 2009.

The graphs show the stock market trend in Hong Kong and New York between the mid of 2007 to the beginning of 2009. Global Financial Crisis, started from the subprime mortgage crisis in the US, had caused recession to the stock markets around the world. (Source: TradingView)

Extra Credits

Advisor   Diana Jou
Editorial Director    Hailey Yip
Multimedia Director    Madeleine Mak
Multimedia Producer   Daoli Zhang & Wulfric Zhang
Illustrator     Simeng Xu
Photographer     Zack Chiang
Copy Editor     Hugo Novales
Fact Checker    Larissa Gao