DESPITE the record-breaking rise in Hong Kong stocks this week, the market remains attractive in relative terms. While high inflation and political uncertainty have weakened the market's rating, over the medium term it offers some of the best earnings in the region. Many institutional investors have focused on this and China's long-term development when considering their weightings in the territory's stocks. In the short term Sino-British relations and the economic clampdown on the mainland have bogged down local sentiment. But they do not appear to have had a huge or direct impact on medium to long-term institutional investors. Traditionally the market has been led by domestic trading investors. However in the current climate institutional participation appears far more significant now and in the future. Many brokerages see the Hang Seng Index at 8,000 by the end of the financial year to March 31. S.G. Warburg estimates the index will be at 8,400, up nine per cent from Thursday's record close of 7,676.22. According to brokerage numbers the index is on a historic price-earnings ratio of 15.2, and prospective PEs of 13.3, 11.5 and 9.9 for 1993, 1994 and 1995. At 8,400 the historic PE would be 14.6, and the 1994 and 1995 prospective PEs would be 12.59 and 10.9 respectively, making the market look undemanding in fundamental terms compared with the rest of Asia. As far as index components are concerned, the recovery in earnings at HSBC Holdings, which makes up 15.34 per cent of the index, is forecast to continue, despite what may be a slow return to healthy earnings at Midland Bank. According to The Estimate Directory, analysts are expecting the group's net profits to grow this year by 40 per cent to $20 billion and its earnings per share to rise 10 per cent to $7.95. For 1994 analysts expect a 20 per cent growth in net profit and earnings per share to $23.9 billion and $9.54 respectively. Hongkong Telecom, accounting for 10.58 per cent of the index, is expected to see 12 per cent growth in net profit to the end of March 1994 to $7.21 billion. Earnings per share are forecast to grow at the same pace to 65 cents. In 1994 the expectation is for 12 per cent growth, again in both net profit and earnings per share. Although staggering growth rates are not expected from these key index components, they show little sign of losing earnings momentum. In this context, and with healthy growth from other key components, progress in the index should be strongly underpinned. The interim reporting season has shown other major Hong Kong corporates to be healthy, with the exception of Cathay Pacific, which comprises 2.27 per cent of the index. The impact of Cathay's troubles on parent Swire Pacific is buffered by strong earnings flow from property. Apart from the disappointment at Cathay there were few surprises, with most groups coming in within market expectations. The property developers and investment property counters, which together make up 24 per cent of the index, appear to have already secured healthy earnings for 1993 and 1994. Despite the feared slowdown in the residential property sector, steady earnings growth averaging more than 16 per cent in 1993 can be expected. Utility companies can expect to see steady growth along with conglomerates. Strong growth can be anticipated from Li Ka-shing's conglomerate Hutchison Whampoa, locally listed mainland investment holding group CITIC Pacific, Wharf and World as income frominvestment property is expected to rise. According to S.G. Warburg, cash-raising poses no threat to market liquidity, while the PE ratio remains only slightly ahead of its five-year average - which takes in Tiananmen Square - of 10.8.