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SCMP Reporter

ING Barings is telling clients to remain underweight on Hong Kong equities, which it forecasts will have the region's lowest earnings growth rate in the next two years.

 Regional strategist Paul Schulte yesterday said the house was maintaining the pessimistic outlook for the SAR it has held for more than a year.

 This is despite the research house's overweight view on the region, built on hopes for a mild Asian recovery.

 'The problem is that technically, things look awful,' he said.

 A key concern was a 'fairly overvalued' currency.

 Another issue for investors was the lack of liquidity, which discouraged taking big positions in the Hong Kong market.

 'Trying to unwind big positive or negative bets is going to be very difficult,' Mr Schulte said.

 Average daily turnover this year has been $4.62 billion, compared with $6.87 billion last year and $15.42 billion in 1997.

 ING Barings forecast that Hong Kong firms would record average growth of 3.14 per cent in Ebitda (earnings before interest charges, taxes, depreciation and amortisation) this year.

 This compares with forecast Ebitda growth of 7.06 per cent in South Korea, 11.37 per cent in Singapore and 25.34 per cent in Thailand.

 It forecast Ebitda growth for Hong Kong firms next year of about 5 per cent, again the lowest in Asia.

 At present, the Hong Kong market was at fair value, calculated on an Ebitda basis. The Hang Seng Index yesterday closed at 9,719.66 points.

 Hong Kong did not have a substitute for the manufacturing sector-led recovery that would spur growth of its neighbours, he said.

 Beijing's largely inward-looking strategy would provide little benefit to Hong Kong's trade-dependent economy.

 'It's hard to see what the engine for growth is going to be for Hong Kong. The willingness is not there yet to address the cost issues,' Mr Schulte said.

 Government spending did not represent a viable way of sustaining higher growth.

 Political and economic considerations would delay a devaluation of the yuan.

 'China has a nasty domestic credit problem. You don't cure this problem with a devaluation,' he said.

 A devaluation would swell foreign-currency debts, which outweighed the benefits to export competitiveness, he said.

 In the region, the cost of capital would stabilise or fall further this year, providing the backdrop for a mild recovery in most other countries.

 ING Barings said it had an overweight recommendation on Singapore, Korea, the Philippines and Thailand, and underweight on the mainland, Hong Kong, Taiwan, Indonesia and Malaysia.



Growth in equities seen trailing region for next two years