Middle East Turmoil Amid Global Stagflation Shadows

In 1979, the global economy reached an extremely uncertain crossroads. Affected by the Iranian Islamic Revolution and the subsequent Iran-Iraq War, global oil supplies suffered a severe shock. During this period, global physical oil production dropped by approximately 4% to 5% in a short time.

Although the production gap seemed limited, the ‘hoarding panic’ triggered by fear was far more lethal than the physical shortage. Oil prices skyrocketed from $13 per barrel to nearly $40 in a short period. Driven by high oil prices, major economies collectively fell into stagflation.

High oil prices pushed the world’s major economies into a ‘stagflation’ dilemma ▼

While Western economies were devastated and mired in recession, Hong Kong, far away in East Asia, charted a markedly different, almost ‘surreal’ independent course.

Hong Kong’s Abnormal Bull Market – Rising Across the Board from Real Estate to Stocks

Under such extremely adverse external conditions, Hong Kong exhibited a counterintuitive prosperity:

First, remarkable GDP performance. During this period, Hong Kong’s nominal GDP growth rate and real GDP growth rate demonstrated a ‘dual-high’ trend, with nominal growth fully offsetting the rise in cost expenditures:

1979: Nominal GDP growth of 25.3%, real growth of 11.5%;

1980: Nominal GDP growth of 25.8%, real growth of 10.1%;

In 1981, nominal GDP grew by 25.9%, while real growth was 9.2%.

Second, the surge in land and real estate prices. Driven by extremely high nominal growth, land became the most sought-after asset allocation target. Between 1979 and 1981, the Hong Kong private residential price index doubled. In August 1980, a plot of land in Admiralty (where the Far East Finance Centre now stands) was sold for over HKD 15,000 per square foot, setting a world record at the time.

Admiralty area of Hong Kong Island in the 1980s, with several tall buildings standing among low-rise structures ▼

The Far East Finance Centre in 1982, gleaming with gold, was the world’s most expensive piece of land at the time ▼

Third, the stock market boom. The Hang Seng Index rose from around 500 points at the beginning of 1979 to approximately 1,810 points by the summer of 1981, peaking at this interim high with an increase of over 260%.

Taking Cheung Kong Holdings as an example, during the 1980-1981 period, its adjusted share price increased fourfold, rising from HKD 4.7 to HKD 30 (pre-adjustment). Driven by frequent financing and mergers and acquisitions, its market capitalization surged from less than HKD 1 billion in 1978 to HKD 6 billion at its peak in 1981. Company profits explosively grew from HKD 133 million in 1978 to HKD 1.385 billion in 1981, multiplying tenfold in four years.

The ‘opposite’ trends of the Hang Seng Index and oil prices ▼

Why was Hong Kong able to create an abnormal bull market?

This unusual bull market was not purely a matter of luck but was driven by multiple unique local macro factors and financial dislocations:

First, explosive support from the demographic dividend. Between 1978 and 1980, due to changes in the mainland’s situation, it is estimated that more than 400,000 new immigrants flooded into Hong Kong. At the micro level, this provided abundant and cheap labor for the manufacturing industry, greatly offsetting rising energy costs; at the macro level, the substantial housing demand generated by these new immigrants became the strongest underlying driver of rising property prices.

Between 1978 and 1980, just before the cancellation of the immigration control policy, Hong Kong’s population showed a significant increase ▼.

Second, the macroeconomic expectations driven by China’s reform and opening-up. At the end of 1978, mainland China launched its reform and opening-up policies, and ethnic Chinese capital astutely anticipated that Hong Kong would restore its function as the “transshipment trade hub” for all of Asia. This nonlinear anticipation of the “China dividend” provided Hong Kong with a vast and growing economic hinterland at a time when Europe and the United States were in decline.

Third, currency “de-anchoring” and negative real interest rate arbitrage. At that time, the Hong Kong dollar was in a free-floating period (1974-1983), and the linked exchange rate system had not yet been implemented. Due to differences in interest rates and inflation, the Hong Kong dollar faced significant depreciation pressure in 1979. In fact, at the beginning of 1979, the Hong Kong dollar to US dollar exchange rate was 4.6, but by 1981 it had dropped to 5.6.

This depreciation unexpectedly brought benefits. The weakening of the Hong Kong dollar enhanced export competitiveness for Hong Kong’s trade. The competitive advantage gained from the depreciation offset the cost increases caused by rising oil prices, making goods manufactured in Hong Kong or transshipped via Hong Kong cheaper than those from Japan, South Korea, Europe, and the US.

Currency depreciation, coupled with rising prices, and an additional 15% interest tax imposed on Hong Kong dollar deposits by regulatory authorities at the time, left the public with no choice but to invest their money in real estate and stocks. Cash holdings and bank deposits were avoided, with nearly all funds flowing into the property and stock markets.

The rise in prices and economic prosperity led to nominal GDP growth in Hong Kong (25%) far exceeding loan interest rates (15%), resulting in negative real borrowing costs. A flood of capital poured into the real estate and stock markets, further driving up asset prices and creating a “bubble.”

In an environment of severe negative interest rates, bank loans flowed heavily into real estate and stocks. Companies like Cheung Kong Holdings, Wharf Holdings, and Sun Hung Kai Properties aggressively borrowed to increase leverage from banks while frequently raising funds in the stock market. Business magnates such as Li Ka-shing and Pao Yu-kong amassed enormous wealth in this environment of severe negative interest rates.

Rising prices, increasing housing prices, and surging stock prices led to a loss of control over Hong Kong’s money supply in the negative interest rate environment. Between 1979 and 1980, the annual growth rate of Hong Kong’s broad money supply (M3) once soared above 40%.

Fourth, the maturation and reallocation of ethnic Chinese capital. The late 1970s to early 1980s was a period of concentrated outbreaks of global geopolitical risks. In December 1979, the Soviet Union officially sent troops into Afghanistan. In September 1980, Iran and Iraq went to war, with the two major oil-producing nations erupting into a full-scale conflict. In 1982, the Falklands War began, with Argentina challenging the old capitalist stronghold of Britain.

With the clear rise in global risks, capital began to “return home and seek shelter.”

When British trading houses chose to contract and leave Hong Kong, Chinese capital opted to exit Western markets and establish itself in Hong Kong. Li Ka-shing’s Cheung Kong Holdings acquired the traditional British trading house Hutchison Whampoa, while shipping magnate Y.K. Pao ‘abandoned ships to land’, mobilizing HKD 2 billion to defeat Jardine Matheson and seize control of Wharf Holdings, gaining a prime location in Tsim Sha Tsui. Cheng Yu-tung utilized Chow Tai Fook’s cash flow to support New World Development, initiating the construction of the Hong Kong Convention and Exhibition Center. Li Zhaoji’s Henderson Land Development aggressively purchased ‘Class B Land Exchange Certificates’ (promissory notes issued by the Hong Kong government to displaced residents) in the semi-primary land market, achieving arbitrage and acquiring vast tracts of land in the New Territories.

As Chinese capital matured, it seized the opportunity presented by an outflow of European and American funds during a negative interest rate environment, taking control of Hong Kong’s land and stock markets at that time. They tolerated extremely high leverage, heavily invested in Hong Kong, and transformed their ‘liquid wealth’ (cash) into ‘hard assets’ (land).

Historical Insights – Asset Allocation and Pricing Power Amid Stagflation

The year 1979 has long passed, and the business tycoons of that era have also left the center stage.

The abnormal bull market during that oil crisis carried evident elements of a liquidity bubble. Negative interest rates drove abnormal increases in consumer prices, housing prices, and stock prices, leading to an asset price bubble which then experienced a sharp correction in 1982.

Nevertheless, looking back on that bull market, it has left Hong Kong, and us, with many insights.

First, rising oil prices and economic stagflation do not necessarily mean a bear market for stocks. In fact, when oil prices doubled in 1979 during global economic stagflation, major stock markets achieved decent returns. The U.S. market rose 12% in 1979. Let’s not forget that in August of that year, Volcker pushed the federal benchmark interest rate to 20%! The Nikkei Index increased by 33% between 1979 and 1981, and London’s FTSE 30 Index gained nearly 20% over three years. The reason is simple: rising prices erode the purchasing power of cash, necessitating assets as a hedge against risk. $S&P 500 Index (.SPX.US)$

What kind of assets should be chosen? It doesn’t have to be energy-related. In fact, after energy stocks surged significantly in 1979, they underperformed throughout the 1980s. The ideal assets are those not significantly negatively affected by energy prices but offer potentially high returns and growth prospects in the future. In other words, current asset allocation should downplay short-term disruptions caused by fluctuations in energy prices, focusing core weightings on long-term assets benefiting from technological progress and industrial revolutions.

The reason Tokyo’s stock market gains were notably higher than those of New York and London was that Japan’s global export competitiveness became stronger amidst the context of high-priced energy. Was mich nicht umbringt, macht mich stärker—what does not kill me makes me stronger. High oil prices eliminated many competitors, allowing Japan’s energy-saving products to sweep the globe in the 1980s after oil prices stabilized.

Secondly, the rise in global geopolitical risks will drive significant capital repatriation back to home countries and familiar markets. During this process, pricing power in some emerging markets will shift. Hong Kong during the late 1970s serves as a typical example. Before that time, the four major British trading houses essentially controlled the economic lifeline of Hong Kong; afterward, local business tycoons took charge of the domestic market. The allocation of Chinese capital shifted from liquid cash to fixed assets like land, moving from overseas to concentrate in Hong Kong. A similar transformation occurred in the composition of the stock market. Now, since the beginning of conflicts involving Russia-Ukraine and Iran, geopolitical risks have been continuously escalating, and the types of capital in the Hong Kong market are also changing. Overseas capital flows in and out intermittently, while the proportion of Chinese capital keeps increasing, with mainland capital steadily flowing southward and large-scale inflows of China’s offshore capital. The influence over pricing in the Hong Kong market is gradually shifting. Looking back at those bold declarations about ‘seizing pricing power’ in past years, they seem somewhat naive, but the trend has become clearly visible for the future.

Thirdly, people are always the most important asset. The population inflow during those years (400,000 new immigrants) provided Hong Kong with valuable human resources and entrepreneurial sparks for its subsequent prosperity. With people came economic innovation, and the sparks for future growth were ignited. Today, 570,000 applications for talent entry have been submitted, nearly 400,000 approved, and about 200,000 individuals have already entered Hong Kong. Housing rents began to rise in November 2024, and property prices started to climb slowly from January 2026. The key going forward is whether Hong Kong can provide sufficient inclusiveness to retain these talents.

Under the shadow of macro uncertainty, Hong Kong’s resilience stems from its unique attributes as both a ‘safe haven’ and an ‘aggregation hub.’ By attracting Chinese capital and global top talents, Hong Kong is expected to transform volatility into momentum, and once again carve out its own certainty in an uncertain world.

(The author of this article is the Global Chief Economist of East West Securities and the CEO of East West Securities (Hong Kong).)

Editor/Doris