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SCMP Reporter

THE Hong Kong stock market is fundamentally over-valued and is vulnerable to swings in, or shocks to, sentiment.

  Liquidity linked to the pitch and yaw of the North American bond prices is the only thing holding the Hang Seng index up and investors should be worried by this.

  Domestically there is nothing holding the index up at current levels. It closed yesterday at 9,873.9, down 10.46 points on the day.

  The residential property market is in a poor state and recovery, at the earliest, will be Lunar New Year. There are no signs of a recovery now so it is unrealistic to discount such a development.

  Corporate earnings are being downgraded by brokerages around town as the second half of the year has been worse than the first, and that was pretty ugly. By the time reporting season comes around for 1996 some of the big blue chips will have run out of funnies in their corporate bag of tricks to maintain earnings growth in exceptionals after three years of slow-down.

  Without property or corporate earnings to clutch, investors buying at current levels have to be relying on a new cut in interest rates in November. This is what North American bond investors are betting on.

   Many cautious strategists in town reckon this is a pretty risky bet.

  Bulls have to be big believers in China and the expected rebound in the economy. The problem for Hong Kong corporates is the benefit to the territory might be a long time coming, like 18 months, even if things really go swimmingly.

  During the summer, investors were buying Hong Kong as it looked like a good home for surplus money relative to the region.

   Hong Kong stocks looked attractive on a valuation basis. The table of data from SBC Warburg shows this is no longer true.

  Only on yield does Hong Kong beat the rest. Sadly, a significant proportion of money investing in the Asia-Pacific, excluding Japan, is not investing for yield.

   If yield was the main criteria the money would not be here in the first place as there are more attractive places in Europe and North America for this type of investment.

  This year Hong Kong almost holds its own in corporate earnings, but next year it is one of the worst performers, second only to South Korea.

  The valuation on prospective earnings at 12.5 times in 1996 is cheap, relative to the region, but it should be because of the poor earnings growth.

  SBC Warburg argues the market is the most expensive in Asia, compared with its historic rating. The brokerage continues to hold to the view 8,800 is a fair value, and where the index is due to stop on December 31, 1995.

  The 8,800 forecast is an old one. It was first published in the spring, when some other strategists were also bears. The brokerage is maintaining its frown in the face of other strategists finding something to smile at.

   At Jardine Fleming the brokerage, in the securities research side, has raised its recommended holding in Hong Kong from under weight to neutral. The brokerage is saying 10,500 to 11,000 is distinctly possible by the year end.

  For many overseas investors the big unknown remains the handover of the territory to China in 1997. This uncertainty demands a risk discount, which is not being offered in either stocks or in the currency.

  The Hang Seng Index is precariously perched. Investors ought to use further surges as profit-taking opportunities or short the market all together.



Take cash and run, or short the market