When Peter Churchouse told a group of investment professionals two weeks ago that the Hang Seng Index would end 1998 at 16,000 points he was greeted with shouts and cheers of encouragement and support. At least, that's the way he remembers it. The reporter who covered that event for this newspaper wrote that Mr Churchouse 'drew hoots and laughter' with his forecast, a claim denied by Mr Churchouse, who said the reporter had 'totally misread the mood of the meeting'. He described the reporter as 'off the planet' and insisted he was greeted with a rousing cheer. 'Peter Churchouse goes bullish' is not news, but 'Peter Churchouse goes bullish and gets laughed at in public' is, so it seemed a good idea to get a little closer to his argument and find out how the market is going to reach these heights. But first it seemed appropriate to try and clear up the 'hoots and laughter' issue. Drake Pike, an executive vice-president at Tokai Securities who attended Mr Churchouse's speech, described the reaction as 'one part surprise, one part scepticism and one part wishful thinking'. Another fund manager who attended the speech, but who asked not to be named, said the reaction had been 'pure shock'. I asked if anyone there had taken it seriously and was told curtly 'of course not'. I asked Mr Churchouse if he thought anyone had taken it seriously, and even he replied 'I don't know.' In an attempt to gauge whether Hong Kong is taking Mr Churchouse's call seriously, I called an arbitrary cross section of three Hong Kong financial industry representatives and asked them - in one word - to sum up what they think of the 16,000 forecast. James Osborn at ING Baring laughed at first and eventually settled on 'aggressive'. James Filmer-Wilson, managing director of Chelsea Securities and a stock broker in Hong Kong for about 25 years, also laughed before describing it as 'optimistic'. Marc Faber was shocked into silence for a few moments but eventually wished Mr Churchouse 'good luck'. He thought a little longer and said: 'The Hang Seng Index will go to 16,000 if Suharto is made head of the IMF.' They can hardly be blamed for their scepticism. The Hang Seng has halved from a high of 16,500 points, the region is in crisis, Japan looks shakier by the day, political uncertainty clouds the US, Indonesia is poised on the edge of social unrest and the region as a whole is in hock to the IMF for about US$100 billion. Hardly a bullish set of circumstances. So what is Mr Churchouse on? As you step into his office it is immediately apparent what he is on. He is on a lot of money. A model of his 54-foot racer-cruiser yacht stands in a glass case. It is a serious boat, and Mr Churchouse informed me it was in Thailand but would be sailed back by the crew fairly soon ahead of a forthcoming race. He is also looking pretty spruce with hair that has clearly had attention paid to it, the characteristic Stalin moustache and a healthy tan that befits the surfer he used to be. He talks as if he is trying to convey enthusiasm and succeeds in doing so, although in his hurry to get words out his ideas sometimes roll together into a statistical monologue. Mr Churchouse is also pretty cashed up right now, having sold his luxury house for an undisclosed sum in the middle of last year - at the top of the market. Alas, at the very same time Mr Churchouse was selling his property, he was telling anyone who would listen that by mid-1998 the Hang Seng would be at 28,000 points. He may be looking good, but Mr Churchouse's credibility is not what it once was. Back in 1994, he was riding high. He had been labelled a property guru and was quoted regularly in the media. He has - for example - appeared in this newspaper in the past three years as many times as fellow guru the Dalai Lama. Crucially, he had gone out on a limb and predicted the office property market would correct by up to 40 per cent. He was right and Mr Churchouse was the man to talk to if you wanted to talk property. But now he is being laughed at. He's the most bullish analyst in town and few people - it seems - agree with the call. 'I think 16,000 is achievable. It implies some fairly basic assumptions and I am making bets on those assumptions coming through. And there is risk to this. This is not a no brainer and I wouldn't put a 95 per cent probability to it, but the way I think the year is going to shape up I think it would be my best guess,' he said. 'There are four basic bets that I am making. First, that Asian currencies stabilise, settle, bottom - whatever you want to call it - over the next couple of months or so and that we don't get another complete tanking of the won, rupiah, baht etc. 'If you look at it from a pure economic point of view - at what has happened to trade and current accounts - if you look at the real effect of exchange rates, which have just plunged, they were overvalued by anything up to 15 to 25 per cent, but are now way undervalued. 'Just take the macro perspective - there is no real economic justification for another leg down. 'However, that is not to say there won't be because it has gone beyond economics now. It has gone from economics to debt to just fear. 'My view is that they have probably just about stabilised. If that is the case, then in theory we should see the pressure on the Hong Kong currency ease off. 'Second, spreads should start to narrow - not to 40-50 basis points. If they come down that'll build more confidence in the interest rate environment, that also should clearly help the Hong Kong banking system and be a positive in the property sector. Near term we've got another leg up in the prime rate but around the end of first half should see pressure coming off here. 'The third assumption is that the residential property market bottoms out in the second half of the year - about 35 to 40 per cent down from the peak of the first half last year. That is pretty serious stuff. 'But the really critical one in all of this is China holding the line on the currency. I am coming down on the balance that China will hold the line for the next nine to 12 months or so. Clearly the temptation domestically due to slowing economic growth and slowing exports is the soft option - export your way out of trouble. 'But there are enough reasons to suggest they do not have to do that any time soon - they can crank up the domestic economy, stimulate the economy fiscally. 'They've got the reserves to do it, the economy isn't highly leveraged, 15 per cent of GDP is foreign debt compared to between 35 and 60 per cent of most other countries in the region. There is a high savings ratio, they can put millions of people to work building housing and roads to ease social tension. 'Although my economists here believe they will devalue sooner rather than later, they are looking at it from a very internal microcosmic point of view, but they may be right. But I am betting the other way and if I am wrong I am going to be wrong big time, but that is the risk you have to take in this game, I guess.' So there is Mr Churchouse's argument for the index going to 16,000 by the end of the year. The problem, as Mr Churchouse is the first to point out, is that 'any one of those things could go wrong'. 'The biggest right now is the China one. I would say that's probably the thing on most people's minds in the US and Europe. 'People in the US are more strongly of the view that China will devalue and the Hong Kong peg will not survive, while people in the UK, I think, tend to be a little more on the fence. 'The US market is going to wake up and say, we're not going to see 8 per cent earnings growth on the Dow. Asia is going to mean that some companies' marginal growth is gone, and suddenly we are staring at a Dow with zero earnings growth. 'What happens to the US stock market when that happens? The smart money in the US is beginning to realise Asia has the potential to create rather nasty waves in the US capital markets.' At this point I started wondering whether I was talking to the same person that had just outlined why the Hang Seng was going to 16,000 points. I have already mentioned that Mr Churchouse is very capable of conveying enthusiasm in the way he speaks, but he seemed to be conveying more enthusiasm about his negative scenario than his positive one. This impression was not diluted when he said the following: 'Global economic growth over the past few years has been on an upward path and what Asia is doing is tipping that path downward globally. Growth is slowing because of Asia. 'What I am concerned about is what happens if the US wakes up one morning and says: 'Hey, we've got zero earnings growth - why am I holding all these stocks at 25 times earnings?' ' The way Mr Churchouse outlined his argument to me mirrored people's impressions from the 'hoots and laughter' speech. Those who attended the function said they found Mr Churchouse's argument completely convincing until the point he made his market call. Why did they find it convincing? Because as they remembered it, it had been a fairly bearish assessment of the present situation. They said they laughed because the bullish call came - as one attendee put it - 'like a bolt from the blue'. All this intensifies the mystery over why he has tagged Morgan Stanley's name to a call few people believe. Is there not enough downside in Mr Churchouse's own argument to indicate the probability of that call coming true must be called into question? Or perhaps he is making it for another reason. 'The danger of being an analyst in this town right now is that if you do voice a concern about the peg or devaluation there is a risk that you will be seen as a pariah and having been a cause in its demise. People are very sensitive here and you have to be very, very delicate, and right now the delicacy is the peg. 'In this town it is very difficult as an analyst to hold a contrary point of view because the risk is you will be seen as the cause of the problem. It really hurts - quite frankly I am flattered that the market thinks that because we are going to underweight Hong Kong that we can drive it down 4,000 points. 'I am flattered to think people believe that, but it is total bullshit - no one has that kind of power. But when you are dealing with a nation's currency and livelihood of six million people, you have to be a little cautious of these views.' The idea that strategists must be positive on Hong Kong because it is politically expedient is a worrying one. There have been incidents where some mainland listed companies have banned analysts from meetings for recommending investors sell the company's shares. Morgan Stanley also fell foul of the politicians when its global strategist, Barton Biggs, cut his Hong Kong weighting to zero, triggering a market correction. I did not get the impression that Mr Churchouse is being bullish just to keep the politicians happy - he appeared to genuinely believe his argument - but he brought up the Barton Biggs call, he brought up the reaction it caused and he made the statement regarding political influence on strategists. And as for the laughter? Mr Churchouse has been laughed at before. He was laughed at when he said the office property market was going to drop 40 per cent in 1994 and he was right. There is some debate in the financial industry over whether or not he was right for the right reasons, but he did call it. Meeting Mr Churchouse I got the impression he couldn't care less whether people were laughing at him. When I asked him about his even more bullish call that the Hang Seng would be at 28,000 points by the middle of next year, he started laughing himself and said that recommendation was 'looking increasingly shaky'. Why bother laughing at Mr Churchouse's calls, I wondered, when his own calls make him laugh too? Peter Churchouse has more than 25 years financial and consultancy experience in many parts of the world including Africa, Europe, New Zealand, the Middle East and Asia. He has advised public and private groups and international agencies in many sectors including industry, housing, tourism, airports, transport, new towns, regional development and financial appraisal. Mr Churchouse is a managing director of Morgan Stanley Asia and is responsible for research activities in all Asia-Pacific markets except Japan.