HONG KONG: A major correction in the city's equity market is looming as a general bearish mood on the near-term outlook for the local bourse is picking up steam.

In the past two weeks, several big players in the financial market including Citigroup, Credit Suisse and Morgan Stanley have voiced a bearish view.

High valuations were cited by the big houses as the main reason for turning cautious about the near-term outlook for the market.

Share prices have far outrun economic fundamentals after gaining more than 60 percent in just three months, they claimed.

Credit Suisse sees a 10-15 percent drop in share prices in a "short-term technical correction".

The sharp rebound in share prices over the past three months have fully reflected expectations for economic improvement in the region as well as globally, the Swiss house said earlier.

Several signs were indicating a looming market correction, including weakening sentiment in the US and weaker capital flows into regional markets, it said.

History shows that the local bourse moves in close step withWall Street most of the time.

Meanwhile, Citigroup also expects share prices to drop 10-15 percent in late summer in a technical correction after the recent sharp rise.

Morgan Stanley and JPMorgan Asset Management, meanwhile, have a "neutral" view on the local stock market for the near term, citing stretched valuations.

Analysts at some local brokerage houses are also generally bearish about the short-term prospect for share prices.

"The sharp rally in share prices was basically fueled by speculation. Profit taking moves by investors will pull share prices down significantly," said Peter Lai, a director at DBS Vickers.

Any bad news from the US could trigger an exodus of capital from Wall Street as well as from the local market, he said.

This could be deteriorating economic data, poor corporate results or a possible crisis in the credit card market, he said.

The reopening of the initial public offering (IPO) market in the mainland posts another risk to the Hong Kong market.

"The IPO frenzy in the mainland market may siphon off a large chunk of liquidity from the Hong Kong market," Lai said.

"The Hang Seng Index could fall below 16,000 points once a correction begins," he said.

Francis Lun, general manager at Fulbright Securities Ltd, also expects the local bourse to retreat below 16,000 points in a month.

Sentiment in the local market has been supported by a bull run in the mainland market, he said.

However, signs are indicating that the Shanghai bourse is facing some correction pressure due to worries that the central government may start to tighten its monetary policy after a record surge in new loans in the first six months.

"A correction in the Shanghai bourse could dent local sentiment and pull down share prices," he said.

Meanwhile, Castor Pang, strategist at Sun Hung Kai Financial Group, sees a 60-percent chance of a near-term market correction that will send the benchmark index down to below 16,000 points.

Some dismal results from US companies, particularly banks, could trigger a correction in global markets, he said.

Investors are increasingly edgy now as the US reporting season approaches, he said.

(HK Edition 07/11/2009 page5)