Goldman Sachs raised its 12-month target for the Hang Seng Index (HSI) to 29,000 points, saying the city has the most to gain from extra liquidity released by quantitative easing programs and China's growth.

Hong Kong will benefit most from capital relocation away from developed to emerging markets, Goldman analysts led by Kinger Lau wrote in a report Wednesday. Inflation and low economic growth are reducing the allure of developed-market assets, the analysts said. Goldman analysts forecast in December the HSI may reach about 27,000 by the end of 2010. The gauge climbed 2 percent to close at 24,144.67 Wednesday.

The US Federal Reserve is likely to announce a plan early today (Hong Kong time) to purchase a further $500 billion of long-term securities to stimulate the economy in a program known as quantitative easing 2 (QE2), according to economists surveyed by Bloomberg News.

"We suspect the resulting liquidity impact could go beyond many investors' expectations," the analysts wrote. "The overwhelming importance of China to the growth in Hong Kong may mask the unfolding trend of gravitational attraction of international capital."

Easy liquidity and Hong Kong's stable regulatory environment make the city's real estate market attractive, and values, which are at 13-year highs, are likely to appreciate, the report said. Property oriented stocks provided a better investment option than the physical market, they said.

Cheap borrowing costs are driving asset prices higher in the city, and Hong Kong Monetary Authority Chief Executive Officer Norman Chan said October 18 that a housing bubble poses the biggest risk to financial stability in Asia. Hong Kong's government has introduced higher down payment ratios since August and pledged to increase land supply to cool the city's property market, where values have jumped 50 percent since the start of 2009.

Emerging economies may use currency appreciation and temporary capital controls to cope with money inflows sparked by US monetary easing, Joseph Yam, former head of the Hong Kong Monetary Authority, said in a speech in Beijing Wednesday.

Also reaping gains from loose monetary policy would be Hong Kong's financial sector, which is already benefiting from the mainland's program of yuan liberalization, the Goldman analysts said.

"A combination of strong domestic growth and abundant global liquidity is how we would describe the investment thesis for Hong Kong," the analysts wrote.

The MSCI Hong Kong Index offers a better proxy for Hong Kong growth than the Hang Seng Index, for which mainland stocks make up 56 percent of market capitalization, the analysts said. They raised their forecast for the MSCI gauge to 14,000 from 12,200.

The analysts said Hong Kong property stocks such as Sun Hung Kai Properties Ltd, Cheung Kong (Holdings) Ltd and MTR Corp would benefit from liquidity-driven real estate inflation.

Financial stocks such as Bank of China Ltd and Hong Kong Exchanges & Clearing Ltd were well positioned to take advantage of further liberalization of the yuan, the analysts said, giving the two stocks a "buy" recommendation.

Bloomberg

(HK Edition 11/04/2010 page3)