WHILE analysts are looking forward to the 1993 reporting season, they are less positive about Hong Kong Inc's prospects for 1994. Any surprises ahead in the next two and a half months of 1993 results are likely to be favourable. In banking, 1993 was seen as a good year for the local sector, and an earnings recovery at Hongkong and Shanghai Banking Corp's overseas subsidiaries is forecast to boost sentiment further. Although Bank of East Asia came in with a terrific 46.8 per cent rise in net profit to $1 billion on fundamental growth, this kind of pleasant surprise, some $150 million above most forecasts, is probably not going to be repeated. The results from Hang Seng Bank in particular are going to be seen as the more accurate barometer of the domestic banking climate. Encouraging earnings in 1993 are also expected from the property developers. The extra special results from Henderson Land Development, Sun Hung Kai Properties and New World Development, which all came in ahead of market expectations, have already resulted in the sector's shares being re-rated. Strong earnings are expected from investment property groups with exposure to the office rental market. This bodes well for selected conglomerates including Wharf (Holdings), Swire Pacific, Wheelock and Co and Jardine Matheson Holdings. Some property developers whose stated intention is to increase the rental income component of their earnings, such as Sun Hung Kai Properties, will be benefiting from the office rent boom forecast ahead. In the hotel sector, a re-rating of stocks has been seen in the wake of a frenzy of activity linked to sales transactions. While earnings are expected to be boosted in the sector, because of a growing shortage of rooms, in many cases the activity has been prompted by the development value of hotel sites being highlighted. Overseas institutions and defensive local institutions still focus on the utilities sector as a source of protected and reliable, high-quality earnings to underpin a portfolio through periods of uncertainty. However, stock prices in this sector already, to a great extent, take this into account. Many analysts believe the earnings of the Hang Seng Index constituents peaked in 1993 and a slowing down in earnings momentum can be expected this year. The outlook for 1994 is less rosy than the outlook was this time last year for 1993. While the stock market overall remains competitively priced against many of its regional counterparts, any re-rating producing significant gains on the index will have to be liquidity driven. The earnings momentum is just not there. Looking at share valuations, many stocks have already become somewhat bloated in terms of price-earnings ratios. There are, of course, some exceptions. In terms of yield the share valuations look vulnerable to any kind of rise in interest rates, making fixed interest investment a little more attractive over the more volatile stock market investment. The yield curve problem is not acute, but in the absence of a revitalisation of earnings, valuations are likely to be undermined by rises in interest rates in the United States. Whether or not the rises come in February or later in the year does not seem to matter; interest rates have bottomed and are set to go up again. For the banks a slow tightening of interest-rate margins will probably cut earnings for the sector. The credit tightening in the residential mortgage sector looks like it will get tighter before it is relaxed, while there may be a shortfall in expected earnings from loan syndications linked to the airport, because of continuing Sino-British bickering. For the property developers some earnings in 1994 are already pretty well booked. But a bonanza in new flat sales on the scale of 1991 to 1992 cannot be expected. Meanwhile, their efforts to lend money to buyers to get round the bank mortgage lending restrictions cannot make up the reduced demand from bank-financed buyers. For investors in blue chip shares there will no doubt be short-term buying opportunities as results come out, but the medium-term looks a bit dim, so this really only leaves investors with long-term plays. Over the next two or three years Hong Kong stocks will no doubt make progress, in the absence of a major set back in China. It could be time for some investors to look again at the smaller companies sector. This got left behind in the blue-chip liquidity boom of the last 18 months and many anomalies still exist. The small to medium-sized banks are expected to perform better than the larger groups in the territory as they are not expected to suffer from the credit restraints now imposed on their bigger brothers and sisters. Selected manufacturing companies can be expected to gain from the recoveries taking place in the United States and some parts of Europe. Meanwhile, in the absence of a set-back in China, the current enthusiasm for red chips is expected to be sustained as the variety of choice widens and new China listings are planned.