Investors urged to overweight HK

Investors should start taking profits if the Hang Seng Index breaches the 12,600-point level but retain an overweight position in Hong Kong, according to HSBC Securities.

'Beyond 12,600 we have been recommending to clients it's time to cash in a little bit - the market has almost doubled from the low [in August last year], it's time to enjoy ourselves,' regional strategist Abhijit Chakrabortti said.

HSBC Securities recommends 43 per cent of regional exposure should be in Hong Kong equities.

The profit-taking advice follows strong gains since last month, with the blue-chip index surging past levels predicted for the year-end by market bulls.

A continued flow of funds into Hong Kong still justified a positive outlook on the stock market, especially as the market was also under-owned relative to the amount of money in the economy, Mr Chakrabortti said.

'The next wave of liquidity will come from the global funds to Asia,' Mr Chakrabortti said.

He expected the prime lending rate to fall a further 50 basis points to end the year at 8 per cent, and he believed Hong Kong was at the bottom of the economic cycle, with growth returning in the third quarter.

In May last year, Mr Chakrabortti forecast the Hang Seng Index would reach 12,800 points within 12 months.

Other strategists shared his outlook for this year, to varying degrees.

DBS Securities research director Frederick Tsang said: 'If big liquidity was not coming in from overseas, then this market would be overvalued.' At the start of this year Mr Tsang forecast the Hang Seng Index might only test 11,500 to 11,800 in the second half of the year.

Others saw even greater upside.

BNP Prime Peregrine regional strategist Raymond Foo said: 'Hong Kong still has a lot of upside from current levels - this is a cyclical upturn.' BNP Prime Peregrine had forecast the stock market would break the 12,000-point barrier in the first half of the year.

'Most markets go up 2.5 times from their cyclical trough, we have gone up just about two times already which suggests at least another 15 to 20 per cent upside,' Mr Foo said.

Mr Chakrabortti said the market could only move beyond 13,500 with a large increase in earnings forecasts - which he said were already positive at 18 per cent growth for this year.

Mr Foo, however, felt earnings forecasts were likely to be revised upwards.

'In a cyclical upturn, you never know how strong the earnings forecast revision will be,' Mr Foo said.

Even analysts who felt the market was well overvalued were cautious of recommending sells amid the current high-liquidity environment.

One said: 'We struggle to see any justification for buying into the market.' However, he agreed the present run of liquidity in the market was unlikely to dry up in the near term.