HONG KONG: DBS Bank sees some downside correction in the local equity market, with the benchmark Hang Seng index likely falling as much as 15 percent in the fourth quarter after strong gains over the past two quarters.

The current level of share prices has fully discounted all positive factors, Daniel Chan, senior investment strategist at DBS Bank, told a press briefing on the outlook for the city's economy and equity market.

Therefore, factors such as profit taking and news or talks about exit strategy for quantitative easing will likely trigger a downside correction in the equity market, he said.

The bank forecasts a 10 percent to 15 percent retreat in equity prices in the fourth quarter this year.

High-beta stocks with comparatively higher volatility-such as property developers and second and third liners will be more vulnerable to the expected retreat, while utility plays will be relatively more resilient, he believes.

However, the forecast correction is unlikely to be rapid, given the fact that liquidity remains ample and new money continues to flow into the territory, the analyst emphasized.

"We see a strong support at around 18,000 to 19,000 points for the benchmark index, unless there is an exodus of liquidity; and so far, we haven't seen any sign of that yet," Chan said.

The bank remains bullish about the medium- to long-term prospects for regional markets, including that of Hong Kong and the mainland, on the ground of strong economic recovery in China, which will more readily benefit neighboring markets.

"Liquidity will likely stay in the region, as economies and corporate earnings generally fare much better here than in the Europe and US," Chan explained.

Meanwhile, DBS Bank has become more optimistic about the prospect for the local economy, citing strengthening private consumption due to the wealth effect of the strong rally in financial and property markets, as well as the stabilizing unemployment situation.

It also cited the commencement of more public infrastructure projects, a steady recovery in private investment over the second half of the year and expected improvement in exports.

The bank has upgraded its growth forecast for the local economy this year to -2.4 percent from -6.4 percent estimated previously while its forecast for 2010 has been raised to 5.5 percent from 2 percent previously.

It also cited a low comparative base for its significant upgrade in the growth forecast for next year.

(HK Edition 09/30/2009 page3)