The Hang Seng Index will climb to at least 13,000 by the end of this year on the back of a steady economic recovery led by the United States, according to a local research house. Cyclical and commodity stocks are expected to form the backbone of the recovery, according to Joseph Tang, head of research at Sung Hung Kai Financial Group. 'For the Hang Seng Index, 13,000 is a very conservative estimation. There could be a further upside revision if the economy fares better than we expect,' Mr Tang said yesterday. The Hang Seng index closed yesterday at 11,217.5. 'Cyclical and commodities stocks, which are sensitive to economic cycles, will perform better this year. Industrial stocks, which have been undervalued since the IT bubble burst last year, are our picks too,' he said. Shanghai Petrochem, Yizheng, Beijing Yanhua, China Aluminium, China Southern, Travelsky, Beijing Airport, CNAC and Hong Kong Exchanges and Clearing were his top picks among the cyclical and commodity stocks. He recommended stocks with a solid and visible income stream and cheap valuations, such as Yue Yuen, Techtronic and Johnson Electric. Mr Tang said City Telecom, Pacific Century CyberWorks and Next Media would also perform better this year. He said Hong Kong stocks were cheap according to his yield spread analysis - a measure of equity market risk premium on top of the risk-free return of treasury papers. 'Stock prices are even cheaper than those in the period of the Gulf War in 1990,' he said. Although Hong Kong would benefit from an improvement in global equity markets, Mr Tang said it would not be foreign investors' first destination of choice for investing capital in Asia. Instead, equity markets in South Korea and Taiwan would attract more foreign investment because they were more sensitive to the US recovery. 'There are a lot of hi-tech elements in their stocks. Most of them are undervalued,' he said. He believed that capital would flow from bonds to equities as the US recovered and interest rates increased. The US would experience a solid and full-fledged recovery no later than the middle of the year, while interest rates would increase by 50 basis points. 'As suggested by US leading indicators, the manufacturing index from the Institute of Supply Management and the increasing consumer confidence, we believe the US economy has bottomed out,' he said. 'It's going to have an obvious recovery by the middle of this year.' With the present low inventory level, Mr Tang believes manufacturing is recovering. Together with increasing domestic demand, the US would have an increase of 1.4 per cent in gross domestic product this year.
