Sentiment sours further on ABN downgrade
ABN Amro Bank has downgraded Hong Kong equities to underweight from overweight, further souring the mood that has gripped the market since the beginning of the year.
The move follows recent recommendation downgrades from Merrill Lynch and Credit Suisse First Boston (CSFB), although both are keeping Hong Kong at market weight. All three banks cite the potential for rapid liquidity outflows and stretched valuations.
'We are still a firm believer of Hong Kong reflation in the medium term, but if the current counter-trend rally in the US dollar continues for a couple of months, the Hong Kong markets could underperform the rest of the region in the first quarter,' ABN strategists Eddie Wong and Ben Rudd wrote in a research note on Monday.
Both ABN and CSFB are also bearish on Asian equity markets this year as they project a slowdown in global economic growth will take a toll on the region's exporters and cyclical stocks.
CSFB's head of Asia-Pacific equity strategy, Stewart Paterson, was pessimistic at a media briefing yesterday, saying United States consumption was likely to disappoint and earnings forecasts would probably be downgraded. Return on equity will deteriorate significantly, valuations are too high and the US dollar is unlikely to weaken much from its recent lows, prompting further liquidity outflows.
'I think at some point investors will get the opportunity to buy the market at 15 to 20 per cent below where they start the year, but at that level it will be quite attractive.'
CSFB's preferred market is Australia, followed by Malaysia and Thailand, while ABN is overweight on the Asean countries. Both banks favour high-yield, defensive sectors such as consumer staples as well as financials, utilities and telecommunications. The materials sector is the largest underweight for both banks.
