Hong Kong blue chips should hit 21,700 before the end of 2007 on a solid earnings outlook and as the property sector recovers, helped by an improving rate outlook, UBS said.

But the banking sector is expected to trail the property market amid slow loan growth, according to the report, although it said HSBC Holdings Plc should still outperform due to its strong mainland strategy.

Meanwhile, battered industrial exporters like Johnson Electric and Techtronic Industries Co Ltd look attractive.

The Swiss bank said its target for the blue-chip Hang Seng index, about 13 per cent higher than Tuesday's close, could surprise on the upside.

"If you ask me, is 21,700 a conservative target, I would say this is very conservative because we have very conservative assumptions in interest rates," Andrew Look, head of Hong Kong Research at UBS, said at a media briefing.

UBS expects the US Fed funds rate to drop from 5.25 per cent to 4.25 per cent by the end of 2007, although Hong Kong may not track the US rate cut in lockstep since it did not follow its rate rise earlier this year. Hong Kong rates tend to follow the US cycle because its currency is pegged to the US dollar.

"If you ask me do I see upside or downside in earnings growth, I can tell you I see more upside," Look said.

UBS forecast an average 12.6 per cent pre-exceptional earnings-per-share growth for 2007 for the companies in the index, a more typical level after 2006's 17.9 per cent forecast.

Cellular operator China Mobile, will be the biggest contributor to earnings growth, followed by HSBC and Hong Kong conglomerate Hutchison Whampoa Ltd.

The city's property market has been sluggish, marking the lowest transaction volume in 10 years, and the Hang Seng property sub-index's rise of about 21 per cent in the year lags the Hang Seng index's 28 per cent.

But the sector should improve as household incomes continue to edge up in a city with record high employment, while the low volume of construction started in recent years could lead to a supply shortfall.