THE market has exhibited surprising resilience to political jitters, punctuated by Governor Chris Patten's Legislative Council speech on Thursday. Selling pressure dwindled after the expiration of the November futures, as the Hang Seng Index continued to consolidate between 8,800 and 9,800. Despite the 70 per cent gain so far this year, the index is expected to resume its upward trend, leading up to the corporate reporting season in spring. The Governor's partial reform bill will be tabled on December 15, removing one big uncertainty hindering the market from rising. Other positives that have developed include a stronger US economy, lower European interest rates, and advice from an established Japanese broker to switch out of Japan into other Asian markets. While we remain cautiously bullish, investors should keep a close eye on renewed overheating in China's economy in the second quarter of 1994. The recent relaxation of China's five-month austerity programme has positively impacted trading activities in both the Hong Kong and China markets. Some glamour red chips have already reached seriously over-bought levels. The traditional year-end rally for banks has once again occurred. Bank of East Asia has staged an outstanding performance over the past few weeks, after a five-month consolidation. It is under heavy pressure to disclose its hidden reserves, and is a big beneficiary of China's planned opening of its financial sector to foreign institutions. With over 40 per cent of its earnings from overseas operations, Hongkong Bank will be least affected by any suggestions from the Consumer Council to abolish the local interest rate cartel, which may eat into local retail banks' fat margins. The gradual improvements seen in the British economy have also made Hongkong Bank a solid earnings play. Property and hotel stocks gathered strength against the market during recent trading activities. We continue to like hotel shares and steeply discounted second-line property stocks. With enormous funds raised by property companies, and the possible return of mainland buying following the recent liquidity squeeze relaxation, demand for high quality investment properties will remain buoyant. As for stock selection, blue chip property counters Hongkong Land and Sun Hung Kai Properties still offer good value. Second liner asset plays Associated Hotels, Wing On Company, Ryoden, Lai Sun Development and Winsor are all trading deeply below their estimated net asset values. These large discounts should narrow in the coming months, particularly in a climate of rising rental rates for most segments of the property market. Frederick Tsang is head of research for Morgan Grenfell Asia Securities.
