Chart of the day: Upside potential in Hang Seng Index
The Hang Seng Index is now trading at 11 times this year's price-earnings ratio, just below the historical average of 12.5 times but higher than the 10.5 times following the global financial crisis. Citi Research has raised its target for the index from 25,000 points to 28,000 by applying the bottom-up methodology based on its analysts' target prices on the constituents. But the research house sees upside risk in its estimate as liquidity is expected to grow further, thanks to the improved southbound liquidity after mutual funds on the mainland are allowed to participate in Shanghai-Hong Kong Stock Connect. The potential increase in the quota for the scheme and the upcoming Shenzhen-Hong Kong stock link could trigger another round of re-rating and liquidity inflows. Citi's HSI target implies an 11.2 times this year's price-earnings ratio, lower than the 16 times for the Shanghai Composite Index and the 12.5 times for the MSCI Emerging Market Index.