NOT EVERYONE believes that next year will see stock markets continue to make strong gains. Hong Kong small shareholder activist David Webb, author of the corporate watchdog webb-site.com, warns a 'major correction' is on the cards for 2007. A former investment banker turned whistle-blower on corrupt business dealings, Mr Webb is also a non-executive director of Hong Kong Exchanges and Clearing, a member of Hong Kong's Takeovers and Mergers Panel, the Takeovers Appeal Committee and a member of the SFC Public Shareholders Group. 'I do not usually make comments in the media about this, but I will make an exception on this occasion,' Mr Webb says. 'We are in a liquidity-fuelled bubble and it cannot last for long before there is a major correction. It is particularly evident in Hong Kong, but generally throughout the region's markets there is an excessive appetite for risk at present, which has driven down the equity risk premium.' In Mr Webb's view, the standard measure of valuation in the equity markets - the multiple at which share prices trade in relation to their earnings, or price to earnings ratio (PER), should be adjusted for changes in accounting standards introduced this year. 'For example, many Hong Kong companies have a lot of property, and the upward revaluation of property prices now goes directly into income statements as a result of the accounting standards, and that amounts to bringing forward the net present value of future earnings. Apply that to a PER and you are putting a multiple on a multiple, whereas to get a true valuation you should strip out those capital items.' Make those adjustments, he adds, and Hong Kong share prices are now trading at PERs of plus-20 - levels which historically have always been followed by a big correction and which compare with historical averages of about 13 to 15. A cautionary tale comes from Martin Hennecke, senior private manager for Bridgewater, one of Hong Kong's smaller independent financial advisory firms which acts as broker/intermediary for a growing clientele of high net-worth individuals. Investors should take heed in the new year, he advises, of the growing stridency of warnings that the record trade imbalances between the US and China may unravel with a calamitous impact on financial markets. 'We are hearing these warnings from the IMF and the Bank for International Settlements and we keep getting record trade deficits, as a result of which the yuan has started to move upwards, but not by much,' Mr Hennecke says. If the creeping advance turns into a flood as the trade imbalances unravel in a spectacular fashion, expect most undervalued Asian currencies to appreciate sharply versus the US dollar as well, he says. Morgan Stanley analysts Malcolm Woo, Ryan Tsai and Corey Ng advise investors to keep an eye on rising political risk in the region in their Asia-Pacific Strategy note. Key elections are due, they point out, in Australia, Hong Kong, South Korea, Taiwan and Thailand, and on top of this are ongoing issues of North Korea, Taiwan's relations with the mainland and post-coup progress in Thailand.