The J.P. Morgan Investor Confidence Index in Hong Kong, which is designed to measure the outlook of retail investors in the local market over the next six months, shows that sentiment has turned bearish once again with toxic assets still worrying investors. The survey results show that market gains are likely to be unsustainable in the medium-term.

The index fell to 95 in the latest survey in March from 98 in December, making this the second straight quarter that the index is below its neutral level of 100. Prior to the past two quarters, the last time the index was below 100 was in July 2006.

The March index shows that the slight rebound of confidence in December 2008 has been undermined again by the weakening global economy. The sub-indices that reflect the Hong Kong investment climate have reached their lowest level since the launch of the survey in mid-2006.

"During the past three months, investors have not seen any concrete results from the rescue plans that were implemented in the US and Europe, and the problem of toxic assets is far from being resolved," says Terry Pan, head of retail business at J.P. Morgan Asset Management. "The Hong Kong economy is also facing problems with rising unemployment the biggest worry. All of this makes investors extremely cautious about their investments."

In the previous quarter, 23% of the survey respondents said they were likely to increase their investment but only 18% said the same this quarter.

Only 31% of survey respondents expect the Hang Seng Index (HSI) to exceed 14,000 points by the end of September, while 39% anticipate the market will move sideways between 12,001 and 14,000 points. Market sentiment has been largely influenced by news of stimulus plans and corporate earnings in the first quarter of 2009. The economic stimulus plans from the US and China, and the increased earnings of some H-share companies have, to some extent, offset the gloomy news in the market. However, the performance of the HSI may stay short-term news-driven for some time.

The index covers six areas: Hong Kong stock market performance, the local economic environment, the local investment environment, the global economic environment, personal asset valuations, and amount of investments. Each of those index components registered an increase in the latest survey, with the exception of plans to increase investments.

Around 58% of survey respondents showed a preference for conservative investment strategies, which is similar to the 61% observed last quarter. Both aggressive (88% for March 2009 and 83% for December 2008) and conservative investors (87% for March 2009 and 94% for December 2008) continue to show a preference for concentrating their investments in the Hong Kong market. Both should be cautious that their portfolios may become vulnerable to the volatility in the Hong Kong market.

The survey also shows that 38% of survey respondents have invested in overseas markets over the past six months. In terms of market preferences, China (68% for March 2009 versus 68% for December 2008), the US (35% for March 2009 versus 28% for December 2008), and emerging markets (30% for March 2009 versus 25% for December 2008) were the preferred overseas markets.

"Faced with the uncertainties of the global economy, local investors tend to invest in markets in which they have the most confidence, and that's China," says Grace Tam, vice-president of investment services at J.P. Morgan Asset Management. "While developed countries such as the US and the UK are expected to have negative GDP growth, China is still eyeing positive growth of 8% this year. China is likely to lead the world economy out of recession."

Cimigo, an independent market research company, was commissioned to conduct the survey on behalf of J.P. Morgan Asset Management. The survey was developed by interviewing a random sampling of 511 retail investors aged between 30 and 60 who have at least 5 years of continuous investment experience with liquid assets in excess of HKD100,000 ($12,900). The survey was completed at the end of March 2009.