The benchmark Hang Seng Index will continue to rise past the 25,000 barrier soon, analysts predict, citing an influx of foreign funds that are bullish on the mainland economy, cheap mainland stocks and the through train scheme, despite government warnings about the local and US economies.
The index rose by 200.93 points to 24,890.34 yesterday, the highest level in more than 3½ years and up by 17.5 per cent since its low point for the year on March 20.
"The Hang Seng Index will continue to rise in the next few weeks. It is likely to break through 25,000 during the third quarter," said AMTD Financial Planning general manager Kenny Tang Sing-hing.
The stock market was receiving a boost from plans, announced in April, for the through train, a cross-border share-trading scheme between Hong Kong and Shanghai scheduled to begin in October, Tang said.
"It attracts overseas funds to buy A shares in the Hong Kong market," he said.
On Tuesday, Secretary for Financial Services and the Treasury Chan Ka-keung warned the inflow of funds into Hong Kong could easily reverse. Chan said the economy was worse than the government expected.
Tang, however, said the index was not fully tied to the Hong Kong economy because more than half of its constituents were mainland firms.
"The market now has a positive outlook on the China economy," he said. "I don't think the funds will leave too soon."
Goldman Sachs forecasts economic growth on the mainland to accelerate in the third quarter.
The average A-share price-earnings ratio on the Shanghai stock exchange was nine, Tang said, lower than the average Hang Seng Index price-earnings ratio of 11 and also lower than United States and European stocks.
Citi estimated that mainland equities were the second cheapest globally, and that "valuation-wise, China equities look attractive on almost every metric".
Stephen Green, the head of Greater China research at Standard Chartered, said the recent influx of capital into Hong Kong had mainly come from the US and Europe.
"Clearly sentiment on China has got better in the past few months," Green said, with central government stimulus measures playing a part.
The Hong Kong Monetary Authority's intervention in the currency markets provided further evidence of the large inflow of funds into Hong Kong, Green said.
It has repeatedly intervened since the beginning of last month to sell almost HK$70 billion and keep the Hong Kong dollar trading at between 7.75 and 7.85 to the US dollar.
HKMA chief executive Norman Chan Tak-lam warned this week that Hong Kong's property market would be hurt when the US ends its quantitative easing policy and raises interest rates.
Tang and Green said they expected the US to raise rates in the second half of next year.
The transition to higher US interest rates would be smooth, Green predicted. He said US Federal Reserve chairman Janet Yellen clearly signalled the raising of interest rates would be gradual given better US economic data.
Tang said rising US interest rates would have some negative impact on Hong Kong's economy, but the effect would be limited because the market had already anticipated it and the US economy was on track to recover, boosting Hong Kong's economy.