Financial analysts predicted Tuesday that the local stock market will remain in an upward trend whether or not the US Federal Reserve launches a third round of quantitative easing (QE3).

Global financial markets were given another boost in the early part of this week after US Federal Reserve Chairman Ben Bernanke said in an interview Sunday with CBS television program 60 Minutes that he refused to rule out extending the monetary stimulus package beyond the initial $600 billion.

"Oh, it's certainly possible," he said. "It depends on the efficacy of the program. It depends on inflation. And finally it depends on how the economy looks."

He also said that it would take another four to five years before US unemployment rates dropped from the 9.8 percent reported in November to more "normal" levels of 4 to 5 percent.

Although the US grew at a modest 2.5 percent in the third quarter, more vigorous growth is needed to bring unemployment down.

However, Banyan Asset Management Chief Investment Officer Norman Chan told China Daily that the launch of a possible QE3 is more rhetoric than reality at this point. He said the US Federal Reserve may not even utilize the whole $600 billion, as it still needs time to gauge the effects of QE2.

Meanwhile, Alroy Financial Services Research Manager Patrick Lam remains bullish about the outlook for the Hong Kong stock market. "Even without the QE3 factor, we are still bullish on the local stock market for the first half of 2011 as the market is supported by reasonable valuation, continuing yuan appreciation and the mainland's interest rate hike cycle," he said.

"The mainland's interest rate hike cycle means that the mainland economy is still in a period of healthy expansion," Lam added.

"If market practitioners get used to the mainland's restrictive policy, then the risk premium required by the investors will be lowered. And with the HSI trading at 17 times its price-to-earnings ratio, it will induce more overseas capital to the local stock market," Lam told China Daily, adding that the HSI will be able to reach 25000 to 26000 points in the first half of 2011.

However, Lam said investment prospects on the local stock market may be more uncertain in the second half of 2011 as the value of the US dollar could rebound, which would in turn reverse the trend of capital inflow into the local stock market.

"If the inflation trend becomes clearer in the US or European economies in the second half of 2011 when the full effects of the QE2 policy come into play, then an interest rate hike in the US or Europe may be possible. This may push the value of the US dollar to bounce back against commodities and other major currencies," Lam said.

"If the US dollar bounces back, it would certainly be negative for the local stock market as overseas capital may flow back into US and European asset markets because of higher interest rates in the US and European markets," he added.

Cantor Fitzgerald Capital Markets (HK) Strategy Head Bruce Wong also agreed with Lam's view that the US dollar may rebound because the unfavorable factors against other major currencies (the euro, Australian dollar, New Zealand dollar, and the Canadian dollar), such as the European debt crisis and the mainland's macroeconomic tightening policies, are beginning to be priced in.

"The short term unfavorable factors for the US dollar have already been priced in. Therefore, I predict that further room for US dollar depreciation is limited," Wong said.

Wong predicted that the Dollar Index, which tracks the greenback's value against major currencies, including the euro, sterling and the yen, will stand at 77 by the end of 2010. The Dollar Index currently is fetching around 79 to 80.

The US Federal Reserve launched QE2 in early November by purchasing more than $600 billion of US Treasury securities.

China Daily

(HK Edition 12/08/2010 page3)