The investment banking arm of BNP Paribas predicted that Hang Seng Index (HSI) would drop to 21,000-mark in the short term.

But the company executive director, Clive McDonnell, tags specific Hong Kong equities in the MSCI (Morgan Stanley capital international index) such as real estate and conglomerate plays "overweight", saying the stocks will be buoyed by the low-interest environment and booming consumption sentiment.

In the light of historical data, Clive said Hong Kong has been in bearish cycle, adding "we believe the cycle could last for 16 months, which means the downturn will remain until February 2009."

Clive said that the HSI would dive to 21,000 in the short run with the slowdown of the red-chips and State-owned company's growth.

Clive said most of the mainland companies are likely to suffer from significant setbacks in earnings with their relatively high basis.

Together with their overshot values, he said the reversal of mainland stocks would pose a significant impact on the Hong Kong market given their considerable weighting in the HSI.

However, Clive said the fundamentals for Hong Kong economy remain strong, which could push the index back to 24,340 level in 12-month horizon.

He suggested that investors could absorb local property and conglomerate stocks such as the Link REIT and MTR Corp. The sector is expected to be boosted by the declining mortgage rate and vibrant retail sentiment.

"But investors are better to adopt a wait-and-see approach in picking the stocks in the near future," he said.

As for the mainland market, Clive said it would face a serious challenge from inflation. He predicted that the inflation rate would peak after Beijing Olympic between 9 and 10 percent, and 7 percent for the whole year.

He predicted that the central government would shift its economic policy from inflation-orientated to growth-orientated after realizing that the cost-pushed inflation could not be curbed via raising interest rate.

He also said that the central government could loosen control on price hike and forecasted renminbi would depreciate 7.2 percent next year.

Adhering to his earlier forecast, UBS Analyst Andrew Luk said HSI's reasonable level should be at 26,800 this year.

"My view is not changed by the negative factors such as Sichuan earthquake," said Luk.

The HSI surged 290 point yesterday, closing at 25,460.

(HK Edition 05/22/2008 page2)