The Hang Seng Index closed the book yesterday on its best-performing quarter in more than 15 years as low interest rates and hopes for a recovery in the mainland economy boosted investor appetite for stocks.
Hong Kong stocks edged down yesterday but the benchmark still closed the second quarter 35.38 per cent higher, erasing a first-quarter decline and finishing the first half up 27.74 per cent at 18,378.73 points.
The Shanghai Composite Index gained 24.7 per cent over the past three months to extend its first-half advance to 62.53 per cent and closed at 2,959.362 points. The mainland equity benchmark has outpaced all other world indices so far this year except for Peru.
'Excessive liquidity was inarguably the biggest driving force for the strong market rally,' said Guotai Junan Securities analyst Zhang Xiuqi. 'It is also expected that the economy has bottomed out and will grow on a fast track in the second half.'
The Shanghai index fell 15.952 points or 0.54 per cent yesterday, after hitting as high as 2,997.272 in the morning, within a stone's throw of the symbolic 3,000-point level.
Analysts said the momentum might continue as the outlook on the mainland economy and corporate earnings improved. Retail sales and industrial production data have already improved and the World Bank last month upgraded its forecast for mainland growth this year.
Some concern, however, has mounted over the quality of the recovery. A China Business News report, citing Wei Jianing, an official at the Development and Research Centre of the State Council, said an estimated 1.16 trillion yuan (HK$1.32 trillion) - 20 per cent of the total loans extended by mainland banks in the January-May period - were illegally invested in the stock market.
And Guotai Junan predicted mainland-listed companies would post an average 10 per cent drop in first-half profit.
Meanwhile, the China Securities Regulatory Commission resumed initial public offerings last month after a nine-month hiatus. Sources said the regulator would go slow in approving new share sales to avert a sharp market correction.
Futures trading turnover jumped 41 per cent to 49.3 trillion yuan in the first half on the mainland's three markets for futures, according to the China Futures Association.
In Hong Kong, more than seven blue chips rose for each that fell during the first half as a wave of liquidity from overseas investors lifted all boats and last year's laggards became this year's front runners.
Foxconn International Holdings and Citic Pacific, the two worst-performing blue chips last year, have gained the most so far and are up 97.67 and 91.17 per cent, respectively.
But sentiment has started to cool. The benchmark barely managed to extend its advance for a fourth month, edging up 1.14 per cent in June after two straight monthly gains of more than 14 per cent. And main-board turnover has only topped HK$80 billion once in the past three and a half weeks after averaging HK$79.41 billion per day in May.
'It's very likely that we will see an outflow of funds in July or August,' said Alex Tang Yee-yuk, the chief market strategist at Core Pacific-Yamaichi International. 'But after the reporting season is over, fund managers may move back again and look for buying targets.'
Mr Tang said the Hang Seng Index might finish the year at about 20,000 points and could resume an upward trend at the end of the summer if market conditions improved.
The index now trades at about 16.4 times earnings, the highest in one and a half years, according to Bloomberg.