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SCMP Reporter

THE stock market is expected to open stronger today on the first trading day of the year.

  However, trading is not expected to be intense as investors are still anxious over a possible further increase in interest rates.

  Bearish sentiment is still in the air and the market is forecast to remain stuck around the 8,000-point level on the Hang Seng Index as long as rising interest rates remain a concern.

  Brokers said trading would continue to be quiet in the first half and would bottom out at the 7,000 to 7,200 level.

  The rise in United States interest rates has dampened global equity markets.

  'As shown by the robust economic indicators in the US, it is fairly reasonable to expect a further interest rate rise in the next two quarters,' a Seapower Research report said.

  It believes the market, at present level, can withstand a 0.5 to one percentage point increase in the first two quarters.

  Investors will remain hesitant as the Federal Reserve will decide whether to increase interest rates at the Federal Open Market Committee meeting on January 31.

  It is expected the size of the rise will probably be either 0.5 or 0.75 percentage point. A 0.75-point increase will send a strong message to the stock market.

  Besides interest rates concern, the local equity market is further inhibited by the unfavourable economic situation in China.

  However, the market is expected to show slow recovery as cautious sentiment prevails in the first half.

  Unlike the nightmarish 1994, when the market fell to the 7,000 level, the new year is forecast to see the index surge to beyond 10,000 in the second half.

  Bullish brokers predict the index will reach 11,000 points in mid-year or by the end of the year at the latest, still well short of the historical peak of 12,201.09 set on January 4 last year.

  On individual sectors, the property market is expected to remain hardest hit.

  Rising interest rates have been a concern to the property market, which has seen property prices sliding especially after the last rate increase in November last year.

  Investors are advised to stay away from high-gearing developers as their profit margins will certainly be eroded by soaring interest rates.

  The Government has increased the supply of land in auctions this year to try to control prices by raising the supply of flats in the territory.

  Analysts think the additional sites will have a mild effect on property prices.

  But it is crystal clear that earnings of the property developers will be the first casualty.

  Last year saw property share prices plummet, making them among the worst performers last year.

   Analysts said the all-important property sector was still correcting and that the chances of a recovery in the first half appeared slim, with interest rates still rising.

  Ben Kwong, research director at Dharmala Securities, said: 'The property market is traditionally very slow at the start of the year and developers are unlikely to launch housing sales until after the Lunar New Year, when people have pocketed their year-end bonus and start looking for a new home.'   Both the retail and industrial are bearish sectors.

  Retail stocks will suffer a tough year as people are less confident to spend as a result of poor stock and property markets triggered by rising interest rates.

  Growth in the retail sector is expected to remain flat while earnings forecast on retail companies are more pessimistic.

  Like last year, the industrial sector will continue to be affected by China's inflation and austerity measures.

  Industrial companies with operations on the mainland will see their earnings erode.

      However, 1995 will be a prosperous year for construction companies buoyed by the new airport projects.

  After the recent Sino-British agreement on new airport financing, tenders for the new airport terminal and the airport railway are soon to come.

  It is expected these projects will raise profit margins of the construction companies.



Fears over increase in rates to keep bulls at bay