HONG KONG: Despite recent fears about Hong Kong's near zero-interest-rate market, excessive inbound liquid capital, and market volatility, investment banks are bullish about Hong Kong and the mainland's equity markets.

According to Thomas Deng, head of China strategy at US investment bank Goldman Sachs, profit growth in the mostly Hong Kong-listed leading mainland companies, will be between 20 percent and 30 percent on average next year, which will fuel a 2010 equity market rally.

"Western countries' money is moving to Asian countries, and that means developed world money is flowing into developing countries - this will be a trend in the next 10 to 20 years," Deng said at press briefing this week.

Liquidity is favorable to mainland shares, particularly the Hong Kong-listed mainland shares, he said.

Deng believes Hong Kong's benchmark Hang Seng Index will climb to about 27,000 next year, while its H-share index, or Hang Seng China Enterprises Index will reach 17,000 by the end of next year.

Loose monetary policies and a huge influx of external liquid capital will propel the city's benchmark upward to 30,000 points next year, predicted BNP Paribas of France. Echoing this optimism, the Swiss investment bank UBS said in an outlook report that it is bullish on Asian stock markets for next year, and that mainland and Hong Kong are its picks.

Japan's Daiwa Securities SMBC sees similarly rosy prospects, saying emerging markets, including Hong Kong, and the mainland's consumption will overtake the US in the coming years.

The International Monetary Fund (IMF) warned in a report on Thursday that strong capital inflows and the resultant large liquidity overhang in the financial system in Hong Kong could potentially lead to rapid credit growth, fueling asset markets and creating macro-economic volatility.

Financial Secretary John Tsang welcomed the IMF's report, saying it was a "fair and balanced" assessment of Hong Kong's overall economic situation.

BNP Paribas thinks the growth driver for Hong Kong will be its role as the mainland's offshore financial center.

"In the next few years, Hong Kong will have a big boom in our view. We are very bullish on Hong Kong because it is a natural offshore (financial) market for China," said Erwin Sanft, head of regional equities research at BNP Paribas Securities (Asia) Ltd.

However, economists at Societe Generale urge investors to brush up on their history and not be so optimistic, warning the economic downturn may be prolonged until next year.

"Recession can follow recovery very quickly, much more quickly than people are thinking," said Albert Edwards, head of global strategy at Societe Generale.

Edwards said in a research report that there had been only two recessions in the 25 years before the current slump, but recessions were typically longer and more frequent before that, with four occurring in the 15 years between 1969 and 1984.

(HK Edition 12/05/2009 page5)