MOST investors looking to maximise their gains from the Hong Kong stock market this year should avoid small counters, investment experts claim.
The big story in the stock market this year has been the inflow of foreign money and this is likely to continue to benefit the larger companies.
Nial Gooding, head of sales at Kleinwort Benson Securities, said: 'When you have the likes of Hutchison Whampoa and HSBC doubling over the last month, why should you bother with Bing Bong Constructions? 'The big companies are where the action is.' Institutional money traditionally favours the Hang Seng Index constituents and other large stocks, leaving smaller companies high and dry in comparison.
Josephine Shaw, portfolio manager at Global Asset Management, said: 'During the past four to six weeks an inflow of funds has led to gains across the board.
'But historically the blue chips have been the main ones to benefit from that.' Cheah Cheng Hye, partner at Value Partners, said: 'Since the summer of 1990, second-liners have under-performed the index.
'There is now an overwhelming negative momentum, that is a fact and there is no way you can get around that.' Out of a total of 540 companies listed in Hong Kong, only about 40 companies can be described as blue chips.
For investors who are determined to seek out smaller companies, gains can be made but this demands thorough research and constant attention.
'Out of the 500 smaller companies in Hong Kong, only about 100 are investment quality so you have to be selective,' Mr Cheah said.
'It is possible to make reasonable returns, but for the man in the street the amount of research, dedication and pure elbow grease required is just not feasible.' Mr Cheah, whose firm specialises in buying 'ugly duckling stocks', said retail and manufacturing sectors offered the best prospects.
'We are picking up retail stocks in a hurry at the moment.
'All of the negative news in the press has created a situation where they are very oversold,' he said, adding that many of them were cheap, misunderstood and maintaining a presence in China.
He said selected manufacturing stocks also offered good value.
Mr Gooding recommended buying individual stocks rather than taking a sectoral approach.
'There is no point in buying smaller companies unless there is something unique about them,' Mr Gooding said.
He said firms like Sime Darby Hong Kong, which has the franchise for a range of luxury cars and industrial equipment, and Sun Fook Kong, a construction and building maintenance company, offered solid investments.
Howard Gorges, managing director at South China Brokerage, was more optimistic about the prospects for smaller companies.
He said this might be the time to consider smaller companies more closely.
'Now the blue chips are close to record levels you begin to see some value shopping for second-liners.
'If you had held a selected red chip or second-liner over the last month you could have made gains of 40 per cent,' Mr Gorges said.
He added that he favoured some of the laggard property stocks, such as Lai Sun Development and Allied Properties.
'If the property market goes better - which I think people are expecting - this should help feed the earnings growth of these companies,' he said.