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HK stocks seen rebounding, rates weigh

HONG KONG: Hong Kong stocks could stage a modest technical rebound this week after Nasdaq's recovery on Friday, but high flying technology shares may cool in the second quarter as investors seek value and cash flow, analysts said.

A trading holiday on Tuesday is likely to lead to quiet trade on Monday, and much depends on whether Wall Street continues its correction next week. Longer term, further hikes in interest rates will weigh increasingly on bank and property counters.

"I think we could see a modest rebound this week but the momentum to push the market higher will not be sharp," said Marco Mak, head of research at Tai Fook Securities.

He said the Hang Seng Index would likely hit stiff resistance at 18,000 points, but had good support at about 16,800.

The blue chip index started last week by powering to a new high of 18,397.57 and staged record closes on Monday and Tuesday. But that was quickly reversed by a Nasdaq technology stock selloff prompted by bearish comments from influential market gurus and the demise of hedge fund company Tiger Management LLC.

The Hang Seng ended the week down 2.1 percent at 17,406.54. But that level marked a 2.6 percent gain for the volatile first quarter, which saw a 3,600-point trading range.

Internet stock fever reached a peak in the first quarter with the initial public offering of Li Ka-shing's Internet portal, Ltd , prompting hundreds of thousands of Hong Kong residents to queue up at banks with double digit gains in their eyes. Some scored big on the IPO.

But by quarter's end, Nasdaq's correction took the shine off many Internet stocks. Electronic commerce applications firm Merchants Ltd saw its shares end their debut on Friday just one penny above their HK$1.48 IPO price.

In New York on Friday, the Nasdaq composite . rebounded by 2.58 percent to 4,572.83, marking a 7.9 percent decline for the week. The Dow Jones industrials . fell 0.53 percent to remain stubbornly below the 11,000 level.

Mak said investors would likely turn away from speculative and unproven "dot-com" shares and seek undervalued stocks and technology plays with more established business models.

He noted, however, that this would do little to push up the index since its weightings are dominated by China Telecom (Hong Kong) Ltd, Hutchison Whampoa Ltd and Cheung Kong (Holdings) Ltd.

"In the fourth quarter of last year, people just bought anything with an 'I' or dot-com," said Philip Mok, head of research at SG Securities. "But I think now people in general will look at stocks with good fundamentals and proper business models."

Michael Liang, vice president at Daiwa Securities, said the week would likely start quietly but could see another sell-off by week's end depending on the performance of U.S. markets.

"Interest rates, Nasdaq and a delay in China's entry to the World Trade Organisation are weighing on the market," Liang said. "It looks increasingly difficult for China to enter the WTO this year. and this is potentially bad news for the market."

He said Hong Kong stocks are still overvalued and investors will be tempted to take profits. HSBC Holdings is not likely to be able to lift the index because higher interest rates would put pressure on bank stocks.

"There won't be a crash, just lower lows and lower highs. It is going to be quiet for the next three to four months," he said.

But the so-called TMT stocks - technology, media and telecommunications - that have been the market's engine over the past quarter, will continue to be the best bet, some analysts say. China Telecom is expected to draw more institutional interest, and quality blue chips that are converting their existing cash-flow businesses to Internet plays, such as Hutchison and CITIC Pacific, should also do well.

"At least for the near term, TMT names look the best. By that we mean the bricks and clicks names, not the pure clicks," said Anil Daswani, head of Hong Kong research at Salomon Smith Barney.

"Given the rising interest rates and the fact that the mortgage market is increasingly competitive and dominated by (mortgage) refinancing, we are unlikely to see a major push from the banking and property sectors in the next two quarters," Daswani said.-Reuters