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SCMP Reporter

Heavyweight brokerage Merrill Lynch sees a correction that could take the Hang Seng Index as low as 12,000 points - 13.8 per cent below yesterday's sold-off levels.

 'We believe that the Hong Kong market is set for a 10-15 per cent correction in the coming three months,' said first vice-president Adrian Faure in a report yesterday.

 Fair value for the blue chip index was about 13,300, but the market could overshoot on the way down, as it did on the way up, Mr Faure said.

 His recommendation was timely; the index lost about 5 per cent yesterday in a broad-based sell-off, bringing gains for the year to only 3.5 per cent.

 Once the market bottoms, Mr Faure sees substantial upside. The index could reach 16,500 by this time next year, assuming a US long-bond yield of 6.5 per cent, he said.

 In the meantime, investors would be better off investing in South Korea or the Philippines, Merrill Lynch said in another report yesterday.

 Merrill Lynch regional strategist Hong Chye Quah has cut the firm's recommended allocation to Hong Kong by 1 percentage point.

 Most of the Hang Seng's gains this year have come from HSBC, Hongkong Telecom and China Light and Power. 'Excluding these, the market is actually down 1.5 per cent,' the report says.

 Mr Hong expects HSBC and China Light to outperform any weakness in the market.

 Once the bank and utilities ran out of steam, there would be little left to hold up the index, he said.

 'Property developers seem set for a correction in anticipation of corrective price measures being imposed by the SAR government,' he said. Merrill Lynch sees more bad news on the horizon in the form of higher US interest rates.



Merrill sees HSI as low as 12,000 after 5pc broad sell-off