Despite Tuesday's slump on the Hong Kong and mainland bourses, analysts remain bullish about both markets' performance in 2015, saying that mainland shares have great potential to rise further with deeper reforms in the cards. Asian News

Blue chips pace slide amid massive profit-taking by mainland investors

Hong Kong stocks tumbled on Tuesday in tandem with a 5.4-percent slide in Shanghai's benchmark index - the biggest one-day slump in five years.

Reversing the recent trend, the Hang Seng Index fell 2.3 percent to 23,485, with 84 percent of the index's constituent shares down from their previous day's closing prices.

Leading the fall was Hong Kong Stock Exchange, which slipped 3.8 percent to HK$176.9. Other blue-chip stocks also took a heavy beating, with Cheung Kong losing 1.7 percent to HK$136 and mainland Internet giant Tencent Holdings Ltd shedding 2.4 percent to HK$115.8.

Analysts said the retreat in Hong Kong was largely triggered by the rout in Shanghai.

Having broken through the 3,000 psychological barrier on Monday, the Shanghai Composite Index fell back to 2,856, begging the question whether the latest rally, which drove the indicator up by almost 40 percent in the past couple of weeks, has lost its steam.

Though caught off guard by the ferocity of the stumble, many Hong Kong stock analysts said they still have faith in the bullish momentum of the mainland stock market. They attributed Tuesday's sell-off to massive profit-taking by mainland investors as they await news from the Central Economic Work Conference which began on Tuesday.

Barclays, for instance, remains positive about the mainland and Hong Kong equity markets in 2015. The bank said the mainland stock market had great potential to rise further and the Hong Kong market would eventually catch up.

"Year-to-date, the Hang Seng China Enterprise Index and the Hang Seng Index have gained 6.1 percent and 2.3 percent, respectively, but valuation remains undemanding on a regional basis at 7.9 times and 11.0 times, one-year trailing price-earnings (P/E)," said Jian Chang, an economist from Barclays.

"In the longer term, we believe a successful rebalancing of the mainland's economy to a more sustainable growth trajectory could help rerate the mainland's decking P/E multiples," said Paul Louie, managing director of Barclays.

He considered the mainland stock market to be "inexpensive" even after the recent rally.

Barclays expected the mainland's economic growth to slow to 7 percent next year, while Hong Kong is likely to achieve a reasonable growth rate of 2.5 percent.

The SAR's economic growth next year is underpinned by improving global economic outlook, according to Barclays.

But "it cannot be denied that the city's political uncertainty can hurt its economy, especially in the fourth quarter of 2014", the bank said.

Meanwhile, Chang predicted that the People's Bank of China will cut its interest rate at least twice in the first half of 2015 and reduce the bank's reserve requirement ratio to help stimulate economic growth.

The monetary easing policy should help boost the traditional interest-rate sensitive industries, including the property, power generation and insurance sectors, Chang said.

Barclays is particularly bullish about the mainland's Internet stocks. "We believe the transition to the mobile revolution and improved monetization opportunity in mobile Internet should continue to benefit most mainland companies, especially those with clear mobile strategies and a strong market position," the bank said.

Barclays added that it was confident of the success of the recently launched Shanghai-Hong Kong Stock Connect program. Confidence in the mainland financial system will be boosted by deeper reform in coming months, Chang said.

"Mainland A-shares are expected to join the MSCI in the middle of 2015, helping to stimulate greater trading volume under the program," she said.

celia@chinadailyhk.com

(HK Edition 12/10/2014 page8)