The earnings of Hang Seng Index (HSI) are likely to decline 4 percent in the coming year, said UBS in a research report published yesterday. The Swiss-based bank has set the index target of 15,900 based on 11 times of PE by the end of 2009.

According to UBS, Asian equities have slumped to 1.11 times of book value. In the last two recoveries in the region, stocks rebounded to an average price-to-book multiple of 1.6 times in six to nine months after touching the bottom.

In 2009, UBS says, it expects a sharp deceleration in China's nominal GDP growth, which will lead to a scenario of disinflation (a slowing of the rate at which prices increase) versus reflation (the act of stimulating the economy by increasing money supply or cutting taxes), and a sentiment of risk aversion means capital will remain scarce and expensive.

"It won't be a problem for the index to reach up to 15,000 points or even 18,000 points in the coming 12 months. We expect the economy to recover in the second half and I assume the stock market has already reached the bottom and will bounce back by then," Patrick Shum, executive director at Karl Thomson said.

Reflecting the four themes such as safety in an earnings recession, net beneficiaries of disinflation, overcapitalized balance sheets and selective Hong Kong value plays, UBS has picked China Mobile, China Yurun Food, China Life, China Resources Power, China Communication Construction, Zhejiang Expressway, Sun Hung Kai Properties, Hang Lung Properties, Esprit, and Cathay Pacific.

Though UBS adheres to "underweight" ratings for technology and industrial stocks, Cathay Pacific, the largest airline in Hong Kong, is picked as lower fuel prices "should underpin" recovery next year, coupled with its competitive position and "attractive valuation" after tumbling 62 percent this year, UBS said.

China Mobile has slumped 48 percent while ICBC, the mainland's largest bank, dipped 31 percent this year. Sun Hung Kai Properties, the second largest local developer by market value, also dropped 66 percent.

Analysts prefer mainland stocks, particularly China Life and resources-related stocks, since the prices have plummeted considerably and it is time for the central government to buy those resources overseas for its own use in the future.

(HK Edition 12/04/2008 page2)