Economic forecasts point to renewed stocks battering - both locally and in the region - as New Year dawns

The annual round of economic forecasts that accompanies the start of Lunar New Year has predicted more woe for stock markets in the upcoming Year of the Snake. Investors looking for better news following the recent sluggish performance of the Hang Seng Index have been advised to expect further volatility.

Leading the way was HSBC's chief investment strategist Eugene Chung who said: 'It is still too early for the region in terms of the angel signs we are looking for to buy'.

His views were echoed by Credit Lyonnais Securities Asia's (CLSA) annual Feng Shui Index, which predicted some fear in the year ahead. While the 'slithering asp' should bring an end-of-year rally, the Hang Seng Index is expected to remain within its current range limits for much of the year.

Hong Kong's economic prospects are also muted. HSBC's Asian economic outlook for this year said 'Hong Kong's safe haven status is at risk'. With falling interest rates and a stable Chinese economy originally expected to benefit Hong Kong, the bank's economists now argue that this is not necessarily true.

'Exports have been the critical factor in driving economic recovery in Hong Kong and the resulting net export surplus has provided liquidity that has supported asset prices,' the report said.

A drop in exports, therefore, would lead to a liquidity squeeze that could hamper Hong Kong's economic recovery.

Invesco's chief economist, John Greenwood, also added to the gloom with his comments that the recovery in domestic demand had only been 'modest', and interest rates in the United States might not fall low enough to prompt a recovery.

HSBC has responded to their concerns by cutting their real gross domestic product growth forecast for this year from 3.9 per cent to 3.4 per cent.

Wage rises are not expected to be high enough to sustain consumption growth once the momentum of rising employment slows. HSBC also believes the introduction of the Mandatory Provident Fund will cut into consumer spending.

Invesco expects three key factors to drive the market in the coming year: liquidity, earnings growth and valuations. 'We expect positive returns from stock markets in 2001,' said Anna Tong, managing director and head of investments of Invesco. 'Equity markets have already moved into fair value, if not undervalued, territory.'

In terms of specific sectors, opinion differed over which area would offer the best value in the coming year. Invesco believes the worst days are over for the technology sector.

'Invesco remains positive on the sector's long-term potential,' said Ms Tong. 'We will be looking to reduce our positions in the defensive stocks and add to consumer cyclicals and technology instead.'

CLSA, however, had little good news for the tech sector.

'The Year of the Snake will be hectic for some as excessive water brings the perfect storm,' reads their Feng Shui Index. 'Massive short squeezes will be seen in bombed-out sectors like technology.'

The Dragon month, from April 5 to May 4, will be a tough one for Hong Kong markets. Semiconductor plays should do well, though, particularly in Taiwan.

Mr Chung also expected the Internet sector to see obstacles this year.

'The year 2000 was the year of TMT [technology, media and telecommunications],' said Mr Chung.

'The year 2001 is the year of quality in terms of high quality companies versus low quality ones.'

'Telecoms companies - the message is to be selective,' said Mr Chung. 'Some companies are overvalued,' he added, citing China Mobile as an example.

As for Internet stocks, Mr Chung said: 'Valuations will never reach what they reached before.'

Mr Chung expects up to 5 per cent growth from residential property this year.

He also predicted a strong performance from semiconductor plays. In terms of Asian countries, he identified serious worries over Malaysia and Thailand and some concerns over China.

'We are still overweight in Hong Kong, with some defensive characteristics,' said Mr Chung. 'In China we have been overweight - we should be moving more towards neutral in terms of stocks, even though we do like the prospects for growth.'

He added: 'The real key risks remain Malaysia and Thailand in terms of corporate governance.'

Graphic: clsa21gwz