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SCMP Reporter

The sheer volume of warrants and options written in Hong Kong heightens the chance of rapid market swings, according to SBC Warburg research director Wong Kam-ming.

  'A piece of relatively minor economic or political news could trigger a market reaction way out of proportion to the original event,' Mr Wong said yesterday.

  The size of Hong Kong's covered warrant market increased dramatically last year, with more than 214 warrant issues.

  Mr Wong said roughly 70 per cent of all Southeast Asian equity derivatives trading is linked to the Hong Kong market.

  'With or without economic justification, any reassessment of the US economy would inevitably lead to a stronger reaction in the Hong Kong market than elsewhere in Asia,' he said.

  As such, the direction of US interest rates remains a major concern. Warburg is anticipating a gradual tightening of the US Fed funds rate by 125 basis point this year.

  Mr Wong said a rate rise would be 'a short-term shock to market, but it should not affect Hong Kong's strong economic fundamentals'.

    'The impact on the property market of a 1 per cent rise in interest rates would be minimal,' he said.

  The relatively low gearing of major Hong Kong companies made them less susceptible to higher rates.

  The debt-to-equity ratio of Hang Seng index constituents now stands at about 19 per cent, compared to 22 per cent in 1995.

  With retail sales and trade expected to pick up this year, Warburg is concentrating on conglomerates and banks.

  It projects private-consumption expenditure will rise 4.8 per cent this year, up from 4 per cent in 1996.

  Domestic exports will see 2 per cent growth this year, rebounding from a 7.8 per cent decline last year, Warburg projected.

  Re-exports would accelerate by 12 per cent from last year's 7.6 per cent on the back of increasing Chinese exports alongside a recovery in global demand, it said.



Warburg warns high volume of warrants generates volatility