Analysts' warnings of more outflows of funds and downgrades of blue chips add to bearish sentiment Thursday's rebound of several leading stocks proved to be short-lived as the market headed downwards again yesterday, with bankers warning of more fund outflows from Hong Kong and fresh downgrades of blue-chip companies by analysts. The Hang Seng Index failed to fully recover after being knocked back by Monday's HSBC annual results. Since then, negative news ranging from fears over the effects of rising interest rates and higher oil prices to the failure of the mainland's austerity measures to cool the economy have dominated the market. The Hang Seng Index dropped 161.59 points, or 1.16 per cent, to close at 13,730.78. Turnover was $22.53 billion, which brokers said was the result of hedge funds and other institutional investors engaging in massive share dumping. During the week, the blue-chip index lost 427.09 points, or 3 per cent. 'While the results of blue-chip companies this week have mostly met or exceeded market expectations, the analyst reports published afterwards have all held a pretty bearish outlook on the market as a whole,' Core Pacific-Yamaichi International research director Alex Tang Yee-yuk said. 'As they don't expect many positive external factors for Hong Kong in the next few months, there are reservations about whether these companies can sustain such massive profit growth. To put it simply, the market just doesn't have much upward momentum,' he said. Leading the fall again was HSBC, which closed at $128, down 0.77 per cent. Brokers said large sell-offs by portfolio managers had more than offset Thursday's retail investor-driven rebound. 'It's another classic example of a grasshopper trying to stop a moving train,' Francis Lun Sheung-nim of Fulbright Securities said. 'With all these institutional investors selling hundreds of thousands of shares there is only very little that the smaller investors can do.' While Mr Lun expected banking stocks to continue to be the main drag, not all lenders have felt the heat. Hang Seng Bank fell 0.93 per cent to $105.50, Wing Lung Bank lost 0.81 per cent to $60.50, Bank of East Asia eased 0.21 per cent to $23.65 while Standard Chartered Bank rose 1.05 per cent to $143.50, its highest since Monday. 'With more bankers coming out over the past few days saying they are worried about funds flowing out of Hong Kong, I think this is a pretty genuine sign that interest rates are about to rise. Banking stocks are looking at a pretty tough time ahead,' Mr Lun said. Yesterday's other losers included telecommunications stocks. Despite an upgrade of PCCW's rating to 'outperform' by Macquarie, the counter dropped 1.66 per cent to $4.425. China Mobile was down 1.81 per cent to $24.30, China Unicom fell 2.06 per cent to $7.10 while Hutchison dropped 1.43 per cent to $68.50. 'PCCW has substantially underperformed, reaching our previous target price of $4.50,' the report said. 'We think the stock's valuation fully reflects investor concerns about future line loss out of Hong Kong. We believe the downside risks from here are low and the stock has suffered sufficient trauma to warrant a positive appreciation of the potential growth avenues open to the company in China.' Looking ahead, the only bright spots for the short term are property and mainland-related shares, according to Mr Lun, even though both sectors continued to fare poorly yesterday. Despite a Merrill Lynch report downgrading the future two-year earnings of Hang Lung Properties, Mr Lun said demand for new flats would continue to stay strong as the improving economy could offset the impact of higher interest rates on the property market. Sun Hung Kai Properties and Hang Lung, which both announced better than expected profit growth on Thursday, fell. SHKP lost 1.04 per cent to $70.75 and Hang Lung plunged 2.96 per cent to $11.45. Swire Properties fell 0.77 per cent to $63.75, while Cheung Kong dropped 1.05 per cent to $70.50. Concerns over rising energy prices contributed to falls in raw material and energy-related stocks, dragging down the H-share index by 62.61 points, or 1.25 per cent, to 4,951.57. Among the biggest losers were Chalco, which fell 3.57 per cent to $4.725, and Zijin Mining, which lost 4.28 per cent to $3.35. 'While the persistent high-speed economic growth in the mainland showed that the austerity measures have not been quite effective in cooling down the economy, the outlook for several industries such as transport, particularly oil shipping, is still very bright,' Mr Lun said.