More life in stock rally

CHRISTMAS has come early with the index soaring to new highs. But will it go higher? We think so - much higher! Despite the rises, we believe that the re-rating process has only recently begun and was signalled by the sustained rise in the prospective price earnings ratio (PER) to more than 12 times 1994 earnings.

Until that happened, the market had been largely rising on earnings growth; despite the sharp rises in the index over the past two years, the prospective PER, until recently, had hardly ever broken 12 times. It was not an expensive market.

It is still not. Historical comparisons are now much less significant given the China factor, and, in any case, these valuations had been falling over the past 15 years.

The market's rating was always at a significant discount to the other regional markets largely because Hong Kong was considered volatile and also because China was viewed negatively.

But Hong Kong is not much more volatile than both Malaysia and Singapore if volatility is measured by the standard academic approach (and this includes the period over Tiananmen Square).

Why should Hong Kong thus trade at valuations some 40 per cent below comparable markets? There is no reason, of course.

China will be viewed as a plus mark as long as progress towards economic liberalisation continues.