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SCMP Reporter

Hong Kong stocks are expected to flirt with record territory this week amid a flood of liquidity and soaring sentiment.

However, the market is not a one-way bet as valuations are looking stretched and many investors may be ready to cash in profits achieved during the recent gains.

The Hang Seng Index closed at 17,920.86 points on Friday, up 0.91 per cent but off its highs, with turnover a four-month record of HK$20.29 billion.

Momentum buying could this week send the benchmark past its record high of 18,301.69 points set in March, Worldsec International director Carlton Poon said.

Most of the good news about peaking interest rates and economic recovery was already priced into stocks and it was hard to see a significant breakout beyond the peak, Mr Poon said.

'I feel that it's very difficult to find anything that looks like compelling value from a fundamental point of view,' he said.

Wall Street fell on Friday as corporate earnings warnings triggered profit-taking. The Dow Jones Industrial Average was down 1.02 per cent at 10,733.56 points and the Nasdaq Composite Index lost 2.15 per cent to 4,094.45 points.

But with the SAR market awash in liquidity, investors might choose to ignore the cue, Mr Poon said.

Profit-taking might gain momentum early in the week before the market headed higher, Tung Tai Securities associate director Kenny Tang Sing-hing forecast. If the index moved lower, he expected it to find strong support at 17,600 points.

'The risk of chasing the market at a high level is increasing,' Mr Tang said.

Mr Poon said from a funds flow perspective, things were looking good. While global money managers were not lifting their regional weightings, some foreign money had been coming in.

'I think what's happening is that quite a number of fund managers are getting concerned about Japan and we are benefiting from that,' Mr Poon said.

Mainland plays were up again strongly on Friday, with red chips rising 4.41 per cent and H shares up 3.65 per cent.

Mr Poon found better fundamental value among them than in SAR companies.

'I think all of them are overbought short-term [but] in light of the economic recovery I can live with the China stocks,' he said.

He recommended utilities and toll road operators for cautious investors, while for the more aggressive he suggested cyclical stocks, as in petrochemical firms, or restructuring stories such as Shanghai Industrial Group.

Another way of controlling risk is to buy Hong Kong Exchanges and Clearing, Indosuez WI Carr Securities suggested.

HKEx is still trading at only 17 times earnings against 23 for the market. The brokerage set a target price of $18 with the index at 18,500 points and $21 with the index at 20,000 points.

'The scarcity and superior quality of HKEx [in terms of its uniqueness and long-term survivability] also reduces the chance of [it] being significantly oversold when the market sentiment is bad,' analyst Keith Cheung said in a report.

Graphic: weeklygbz



Strong liquidity and improving sentiment on mainland could push HSI past peak