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SCMP Reporter

FROM darkness into light. Or so it seems when looking at equity market sentiment in the region.

Having come through one of the worst bear markets in Hong Kong since the early 1980s, from late January 1994 to March 1995, things seem to be looking up.

In an Asia Pacific strategy guide for the third quarter, Pauline Gately and Nigel Tupper at Smith New Court Far East are keen on Hong Kong and Singapore.

From pariah, Hong Kong has become the investment community darling, and all in seven days.

Looking at the global situation, Smith New Court sees continued slowing economies and falling bond yields in the United States and Europe.

 Equities are going to be better than cash as yields slide.

In Asia, easier monetary policy will support price earnings expansion in the region's dollar-linked markets.

'Historical relationships between interest rates and earnings suggest that earnings growth in Asia's markets will benefit,' the brokerage says.

Tied in with earnings as the interest rate cycle turns, Hong Kong and Singapore stock markets are expected to be the biggest beneficiaries.

 An upgrade of 4.5 per cent for every 100 basis points shaved off prime-lending is expected in Hong Kong and 3.8 per cent on the same basis is forecast in Singapore.

'For both economies, the transmission takes about 12 months, so the initial impact will not show until 1996,' says Smith New Court.

The brokerage expects the US Fed funds rate to fall to five per cent, a percentage point decline.

Singapore is especially worth watching because monetary easing is expected. Malaysia, Thailand and Indonesia are over-stretched.

Hong Kong is an overweight recommendation because of the strong leverage to declining US interest rates.

 This is expected to help 1996 corporate earnings.

On the downside, the very nature of the market's interest-rate sensitivity makes it vulnerable to any reversal in the US bond market.

 Interim results are not expected to be very exciting and activity in pre-sales in the residential market is set to slow over the next year.

A big event to watch out for is the result of the tendering for the Tamar Basin site.

 This will be taken as an important indicator of sentiment among property developers.

  Another important tender will be the Mass Transit Railway site in Central.

In Singapore, Smith New Court is signalling a reversal of the restrictive Monetary Authority of Singapore's stance towards exchange-rate policy.

 Unit labour costs have not yet peaked in the city state, which could delay the expected easing in the authority's policy.



New investment darling emerges