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SCMP Reporter

This time it really is different. Hong Kong stocks have entered a secular bear market which can keep bulls on the run for the next 10 to 25 years, says a regional technical analyst.

 HSBC Securities analyst Chris Roberts said the recovery in the Hang Seng Index was likely to be short-lived and new lows should unfold later this year or next.

 He said the index could fall to as low as 3,454 points in the next decline, meaning trading and not buying and holding was the appropriate strategy for investors.

 Mr Roberts said: 'We believe the August 1997 all-time high of 16,820 is extremely significant.

 'The weight of evidence suggests that Hong Kong has moved into a secular downtrend.'  In this, the bear market cycles are more powerful and last longer than the bull phases, which do not take the index to new highs.

 The long wave extends over years, usually a decade, and often as long as 25 years.

 The secular bull phase now believed ended lasted 23 years, getting under way in 1974 when the Hang Seng Index stood at a meagre 171 points.

 Mr Roberts said there was growing evidence a secular bear phase had begun.

 A number of other Asian markets had already moved into secular downtrends, including South Korea, Malaysia and Thailand.

 This can be confirmed when a market breaks below the latest cyclical bear market low.

 In 1996, Thai stock prices broke the previous cycle in 1995, while Malaysia's benchmark index broke its 1995 cyclical bear market low last year.

 The key level for Hong Kong is 7,343, which was the Hang Seng Index monthly closing low in the 1994-95 bear market.

 The index has yet to fall that low, but 18 of the 33 constituent stocks have already cracked their 1995 weekly closing lows.

 Mr Roberts said: 'If the current decline is a normal cyclical bear market, it is unusual that 55 per cent of the index's constituents have moved below the previous bear cycle low.

 'The picture has been very distorted by the performance of HSBC which has outperformed significantly throughout the bull market and since the August peak.'  He said a road-map for the expected secular bear market could be provided by the Elliot Wave theory, which argues that markets expand and contract in a limited number of recognisable patterns.

 Applying the theory, the decline which carried the market down from 16,820 to the low of 7,909 is likely to be only Wave A of the extended bear phase.

 Wave B should see a recovery of about 55 to 70 per cent and is expected to lift the Hang Seng Index to between 12,365 and 13,416.

 This will be succeeded by another leg down as Wave C develops, which will see the Hang Seng Index eventually breaking the low set in Wave A.

 Mr Roberts said: 'It is this outlook that leads us to stress that buying and holding is no longer an appropriate strategy in Hong Kong. We believe a more flexible trading approach is going to be a far more effective strategy for the next few years.'  He said the candidates for early leadership in a rally included Cheung Kong (Holdings), Citic Pacific, HSBC Holdings, Hang Seng Bank, Hutchison Whampoa and New World Development Co.



HSI 'begins' downtrend