HK market expects rate cut of at least half point - Rate-sensitive plays seen outperforming the market
By Audrey Tan in Hongkong
ALREADY soft from a poor economic outlook and the contagion effect of Wall Street, Hongkong stocks could take a further tumble tomorrow if the US Federal Reserve fails to act decisively by cutting rates by at least 50 basis points today.
Yesterday, the benchmark Hang Seng Index (HSI) fell 64.35 points to 13,457.69, mimicking Wall Street's drop on Friday when US stocks hit a two-year low. But brokers said that expectations of a rate cut of between 50 and 75 basis points cushioned the market's tumble.
Gilbert Chu, executive director of Sun Hung Kai Securities, said: "The Hongkong market has already factored in a rate cut by the Fed, so we have not seen a panic situation yet despite Wall Street's performance on Friday.
"People are expecting a cut of at least 50 basis points, but there's the possibility of a 75 bp cut. If the cut is less than 50 basis points or there is no cut at all, the reaction of the markets will be harsh. It will send a shiver through the US markets and Asian markets as well."
Henry Lee, managing director of fund manager The Hendale group, agreed: "The expected rate cuts will set the tone for the Hongkong market. If there is no cut, investors will have further reason to sell down stocks."
Yesterday, investors moved their funds into defensive plays as well as rate-sensitive stocks. Utilities stocks were the biggest gainers, rising 2.2 per cent as a group.
Property stocks rose 0.71 per cent, though trading volume was thin ahead of earnings announcements by heavyweights Cheung Kong Holdings, Henderson Land and Sino Land later this week.
The lower interest rates are expected to help stimulate interest in property buying, though the two half-a-point rate cuts by the Fed earlier this year have yet to kick-start sluggish property sales.
Despite conflicting economic signals in the US, Hongkong investors are still banking on the Fed to act to stave off a severe recession.
Mr Chu noted that US consumer confidence data released over the weekend was stronger than expected, though producer price and output data were weak.
But he said: "I'm still expecting a rate cut. Sure, there are conflicting indications, but overall, they still point to a severe recession. I think (Fed chairman) Alan Greenspan will try to neutralise that."
But analysts say that the market is likely to shrug off another 50 basis point cut.
Philip Chan, research director at Shenyin Wanguo Securities, said: "Unless the cut is more than 50 basis points, the response of the market will be muted. We will need a 75 bp cut to see a good bounce in the market."
Analysts expect rate-sensitive plays to continue to outperform the market. Companies with high gearing, such as Pacific Century CyberWorks, will also benefit from lower interest payments, they say.
Mr Chu also picks defensive stocks such as utilities and the Mass Transit Railway Corporation, which he says also have good dividend yields. And China plays will continue to hold investors' interest, ahead of China's entry into the World Trade Organization.
Yesterday, H shares (Hongkong shares of China-registered companies) bucked the general downtrend, by rising 1.56 per cent.
But Shenyin Wanguo's Mr Chan said that the outlook for Hongkong stocks continues to be shaky, with or without a US rate cut.
"I think that the medium-term outlook for the Hongkong market will be volatile, because the economic picture and earnings results will determine the day-to-day reaction of investors. And the news for these will not be too good," he said.
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