HK stocks seen depressed after Taiwan

Hong Kong’s blue chip Hang Seng Index was shaken for much of last week by China’s sabre-rattling to head off a DPP win, but on Friday, the market took its cue from a record setting rally by the Dow Jones Industrial average.

The Hang Seng surged 723.99 points, 4.43 per cent, to close at 17,082.99, recouping nearly half of its 1,472-point drop in the first four trading days. It was down 4.2 per cent on the week.

Attention this week will be focused on any renewed tension with Beijing created by the victory of Taiwan President-elect Chen Shui-bian and his pro-independence Democratic Progressive Party (DPP).

Several analysts said the main question was whether Beijing backed away from earlier threats to retaliate against a pro-independence leader in Taiwan.

"Overall sentiment will be determined by China and Taiwan,"said Howard Gorges, director of South China Brokerage. "It will be a bit of follow the leader. There will be caution at the start but if there’s not much selling, we could see a turnaround.

Changes to MSCI index could lend support
Analysts saw some support but little real upside potential in changes to Morgan Stanley Capital International’s (MSCI) China Free Index, which many fund managers use to allocate assets and measure performance.

MSCI added 15 China-linked Red Chips to the index in a wider re-evaluation than the market expected. Twenty-two companies were removed.

"The main changes are that the so-called Red Chips will be included in our definition of the China Free Universe," said John Fildes, vice president of Morgan Stanley Asia Ltd. "The market capitalisation of the MSCI China Free Index will go from US$3.9 billion to US$81 billion."

The Red Chips are companies which are incorporated and listed in Hong Kong but have most of their business in China and whose major shareholders are organisations owned by the state.

Among the new companies in the index were China Telecom (Hong Kong), Legend Holdings Ltd, China Everbright Ltd, Citic Pacific Ltd, Cosco Pacific Ltd and Founder (Hong Kong) Ltd.

China Telecom will be included with a market capitalisation factor of 0.4 and Legend, with with a factor of 0.8, while all other constitutents would be included at 100 percent of their market capitalisation.

But Red Chips formed too small a part of the Hang Seng Index to be the sole drivers of a major movement, Gorges said.

Interest rates also spooking market
Investors were also cautious ahead of the US Federal Open Market Committee monetary policy meeting on Tuesday. Many economists believe the Fed will push up its key interest rates by 25 basis points following the regular gathering.

Such a move would likely push up Hong Kong’s interest rates at the weekly meeting of the Hong Kong Association of Banks on Friday.

"Hong Kong stocks are going to be volatile next week because of the Taiwan election, the US Fed meeting on Tuesday, Cheung Kong and Hutchison earnings and the MSCI announcement," Stephen Li, Hong Kong strategist for Jardine Fleming Securities, said.

Cheung Kong (Holdings) Ltd and affiliate Hutchison Whampoa Ltd, both top Hong Kong blue chips, are due to report year-end results on Thursday.

Andrew Look, regional director for Prudential Portfolio Managers (Asia), said any fall in technology shares could bring some of the traditional or "old economy" stocks back into favour.