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Improving earnings growth momentum is the key driver for the Hong Kong economy, according to UBS
"Earnings growth momentum rather than liquidity which has never exerted a significant influence on movement in the Hang Seng Index, is the key driver of the economy in Hong Kong," said Andrew LOOK, Head of Hong Kong strategy, at UBS Investment Bank.
"It is worth noting that, at the end of last year, pre-exceptional earning growth estimates for 2005 and 2006 were 11.5% and 8.1% respectively. At the end of September 2005, they stood at 18.6% and 18.4% respectively", noted Look.
"Contrary to the popular view, we regard neither the strong primary equity pipeline nor increasing warrant turnover as having the potential to derail the recovery. We estimate that HK$105 billion in new equity will be raised in the final quarter of this year, against HK$182.97 billion raised in the first three quarters. However, net investable equity supply as a percentage of average market capitalisation in 2005 stands at a relatively modest 0.9%, against 1.7% last year and 7.3% in 2000.
"It should also be remembered that warrant turnover as a percentage of market turnover was not high at previous market peaks. For example, in September 1987 it stood at 5.37%; in December 1993 at 13.06%; in July 1997 at 10.84%; and in August 2000 at 7.77%. However, large initial public offerings from China have fuelled growth in warrants and in derivatives in general. The market has been further buoyed by a distribution platform which is friendly to retail investors, as large investment banks have subsidised retail brokers to ensure strong participation on the part of retail investors in the new issue market," he added.
"In the current environment, developers, especially those that had aggressively added to their land bank during the recession years of 1998 - 2003, will be the prime beneficiaries of margin expansion as well as sales volume growth. Banks, on the other hand, have underperformed developers/landlords by as much as 35% since the market trough in May 2003. Given the slow recovery in loan growth, we believe investors should focus on banks with high-quality management who are targeting growth of high-margin businesses such as personal loans. Last but not least, industrial/exporters' share prices have seen significant de-rating in 2005, thanks to rising raw material prices and a possible slowdown in US consumer demand growth," he added
"Rising asset prices and the improved employment market have propelled a recovery in consumption - economic confidence is at its highest level for 16 years, according to AC Nielsen - but this is likely to bring with it increases in rents in the retail property sector. As a result, we prefer retail landlords to retailers themselves," he said.
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Hong Kong, November 8, 2005
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