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Limit to upside potential

THE Hongkong market began the month of April on a firmer note with the Hang Seng once again testing the 6,400-6,500 resistance area. However, the three-day trading week ended at 6,285, a fall of about 120 points on the week. This correction is rather modest when compared with the sharp rebound from 5,750 to the 6,400 level during the month of March.

Divergence between volume and price movement, however, has been confirmed. Ahead of the Easter break, average daily turnover had fallen by 27 per cent compared with the previous week's volume. Both short-and long-term momentum indicators also appear to be deteriorating, implying that the upside potential of the Hongkong market for the short term is limited.

In the coming weeks, the market is expected to trade within a narrow range due to a lack of new motivating factors. There will be strong resistance at 6,500 and support at the 6,000 level.

Fundamentally, the prospects of strong corporate earnings for this year have been factored into the current price level. Since most of the blue chips have already released their final results, we should expect a period of consolidation.

In addition, cash calls, and rumours of more cash calls, have kept investors on the sidelines. For the first quarter alone, total cash raised through share placements exceeded well over $16 billion, or $18 billion, including new listings.

Although the market remains lacklustre, long-term uptrend appears to be still in fairly good shape. There are exceptionally good buy opportunities.

China plays, for example, are back in favour. Recently, over a two-week period, our Dao Heng Red-chip Index has shown a distinct ability to outperform the HSI. The best performed counters include CITIC Pacific, Guangdong Investment, Union Bank, Ka Wah Bank, China Resources, Conic, Santai, and Min Xin.

In the coming months, we feel CITIC Pacific, Guangdong Investment and China Overseas Land, in particular, should attract strong buying.

We believe CITIC Pacific will become one of the largest hongs in the run-up to 1997. It has emerged as one of the large cap stocks with an aggregate market value of about $30 billion.

Guangdong Investment is transforming into a medium-size conglomerate. Its exposure to the rapidly growing Guangdong region will accelerate earnings growth in years ahead. The share is some 27 per cent off last July's peak of $4. Riding on its strong Chinese background, the redchip conglomerate deserves a premium rating.

The major appeal of China Overseas Land is its stature within the industry, expertise in property development, and strong backing from China authorities. Should the real estate market in China and Hongkong stage an upturn, this counter will become extremely profitable.

Alex Tang is head of research at Dao Heng Securities