DESPITE a poor performance in the second half, the Hang Seng Index managed to end the year with a gain of 28 per cent, placing this market among the world's best, two years in a row. A repeat of this achievement in 1993 has become increasingly difficult. To start with, the relative attractiveness of this market is likely to decline in the year ahead. Over the past two years, Hongkong's nominal gross domestic product has grown much faster than other major economies in the world. This was due to high inflation and a continued expansion of its economy led by rapid economic growth in southern China, at a time when most western economies were in recession. This discrepancy in performance is expected to narrow in 1993. The best-case scenario is that Hongkong will achieve a GDP growth similar to that of last year. Under the worst-case scenario, with the assumptions of a prolonged Sino-British confrontation and the withdrawal of China's Most Favoured Nation trade status by the US, real GDP growth will shed more than a third to a meagre 3.5 per cent, with easing inflation. By contrast, major industrialised countries, except Germany and France, are expected to see their economic growth quickening. Though a significant contributory force, China is also a source of uncertainty for Hongkong, its economy depends heavily on the former. Deteriorating relationship with foreign countries, coupled with an overheated economy, will provide the hard-liners with an opportunity to regain power, possibly undermining the current reform efforts. Back home, weaknesses in the residential property market have resulted in developers achieving a flat performance in 1992. Despite their efforts to support the market with the provision of additional financing, both the Hongkong and China authorities have denounced this practice and preferred a longer consolidation period for property prices. Until the property market stabilises, any rebound in their share prices will not last. Moving divergently from developers are banks, dominating the list of top performers. While it is too early to judge whether the property price correction will have a severe impact on banks, their earnings prospects are less promising than in previous years. A further drop in property prices should trigger heavy profit-taking activity, particularly for the local operations. Persistently high inflation is also limiting the profit growth of the commerce sector, while an expected rise in local interest rates, following the US lead, will reduce the attractiveness of utility shares. Frederick Tsang is head of research at Morgan Grenfell Asia Securities.