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The Hang Seng Index is on target to hit 21,700 by the end of 2007.

Hong Kong | | Media Releases APAC

But while the property market is all set to gain traction in 2007 after a flat 2006 the banking sector will remain under pressure, according to Andrew LOOK, Head of Hong Kong Research, Strategy and Product at UBS.

Respectable earnings growth will be the key driver in the coming year for the Hang Seng Index, according to UBS. Based on the bank's assumption of 12.6% pre-exceptional earnings per share growth and mean reversion of a 1.3% interest rate premium of 10-year HK$ swap rate over 10-year US treasury yield the index target is 21,700.

"Indeed, 21,700 could still be on the conservative side as this number does not take into account any assumptions with regards to PER multiple expansion or an increase in liquidity in the banking system that would depress the local interest rate," says Look.

Adding to the positive momentum, Eric WONG, Director and Co-Head of Asia Real Estate Research, believes that the property market will also have a strong year.

"Next year will be the Golden Year for Hong Kong property. Reasons include: household incomes continuing to rise in a market with record high employment; potential rate cuts in the US due to a slowing economy; potential interest rate cuts in Hong Kong because of surging levels of liquidity in the banking sector; and the public become more aware of the lower levels of supply in the private sector housing market. Taking all these factors into account, this market will go from strength to strength," says Wong.

However, not all sectors will post such a strong performance. Look's outlook for Hong Kong's banks is less bright. "Since SARs, the banks have underperformed property developers by 25%. And because loan growth in this increasingly competitive area remains sluggish and profit margins remain under pressure, we remain cautious on the growth momentum of Hong Kong's listed banks," he said.

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