Goldman Sachs predicts that local derivative market will continue to shrink next year following a 27-percent decline in warrant transaction to HK$3.4 trillion in 2008, though trading of callable bull/bear contracts (CBBC) will remain strong with the volatile equity market.

Goldman Sachs head of securitized derivatives products (Hong Kong) Dustin Kuo said that turnover of warrants eased a five-year winning streak to drop 27 percent to HK$3.4 trillion in 2008, accounting for 19.6 percent overall transaction in the equity market.

Together with CBBC - which tracked the performance of an underlying asset, the overall transaction of derivative products amounted to HK$4.5 trillion in 2008, down 6.4 percent. With the high market volatility, it lowers the leverage rate of warrant products. More capitals, therefore, will shift to CBBC instead, he added.

Speaking about the market outlook, he believed that derivative market will continue to shrink along with the worsening economy. CBBC market, however, will outpace counterparts if the market fluctuates.

About HK$23.5 billion flowed into call warrants in 2008, while HK$1.55 billion moved out of put warrants.

Kuo predicted that the capital flow will revise in view of the bearish market sentiment.

Kenneth Kok, executive director of Asia-Pacific investment research at Goldman Sachs, noted that the global economy will enter into a prolonged correction, predicting Hong Kong GDP growth will slow down from 3.5 percent in 2008 to negative 3 percent next year.

"The equity market is fraught with uncertainties," he said. "There are about $160 billion mutual funds in long position in the global financial market. Market worries that the floundering US economy will spark a redemption of the funds."

He believed that the Hang Seng Index will linger around 16,800 next year. He also predicted that the property sector will see a 30 percent fall in flat prices due to soaring unemployment rate and the economic downturn.

Regarding the mainland, Kok predicted that its GDP growth will slow down to 6 percent next year. However, the mainland's massive foreign reserves and healthy balance of payment will help it launch stimulus packages, though its economy might undergo deflation due to its loosening monetary policies, he said.

Kok favored mainland stocks, saying the market will eclipse other peers, at which stocks with infrastructure and agricultural reform will come to the top of the list.

(HK Edition 12/30/2008 page3)