HONG KONG: The recovery path of the local equity market remains intact despite a share price decline of 4.1 percent over the past month, the first monthly fall in six months, on worries about monetary tightening in the mainland, analysts said.

The benchmark Hang Seng index retreated to 19,724.19 points at the close of the last trading day of August, from 20,573.33 points at the end of July.

"The retreat is a healthy correction after sharp gains in the past few months," said Patrick Yiu, an associate director at CASH Asset Management Ltd.

Local share prices have rallied by as much as 73 percent from a low in early March this year, with the key index hitting a high of 21,196.75 points on August 4, mainly driven by strong liquidity brought about by global quantitative easing, particularly in the mainland.

The rebound in share prices remains on course as the international commodity market and overseas equity markets still perform well, Yiu said.

"With economies improving, corporate operating results will also improve, providing support for share prices," he said.

The fall in local share prices last month was also a knee-jerk reaction to the sharp correction in the Shanghai market, analysts said.

The Shanghai Composite Index slumped over 21 percent in August alone on increasing worries over the impact of mainland authorities' monetary-tightening moves on market liquidity.

New loans generated by banks on the mainland shrank significantly to 200 billion yuan in August, from 355.9 billion yuan in July and a staggering 1.5 trillion in June, reported Caijing, a magazine run by central monetary authorities.

"Worries over monetary tightening weighed on mainland share markets as well as sentiment for locally-listed shares of mainland firms," CASH Asset Management's Yiu said.

Matthew Kwok, deputy research head at Hai Tong (HK) Financial Holdings Ltd, also blamed uncertainties over Beijing's monetary policies for the slump in mainland markets, which triggered the correction in the local bourse last month.

Both Kwok and Yiu believe that the "healthy" correction in the local market will continue through the middle of September.

"There is talk in the market that mainland authorities will soon announce market-supporting measures to stop the slide in mainland markets," Kwok said.

However, he believes that "support measures are unlikely to come until at least the middle of September, unless the Shanghai bourse plunges in the coming few days".

The analyst expects the benchmark index to find a support at around 19,000 points. Yiu also expects share prices to perform better in September as the central government could loosen its grip on liquidity after some monetary-tightening moves in July and August.

"Over-tightening could choke the economic recovery on the mainland," he explained.

Linus Yip, investment strategist at First Shanghai Securities Ltd, also believes that the five-month-long rally in the local bourse hasn't ended yet as the liquidity-flooded market condition remains.

Hot money hasn't flowed out yet, as indicated by the still extraordinary low inter-bank call rates, he said.

"The current share market rally is driven by liquidity rather than by fundamentals," he explained.

The valuation of local share prices, currently at around 17 times their past earnings, is an "acceptable" level amid the ample liquidity environment, although it may be considered a bit high on fundamental consideration.

As long as liquidity remains, the market won't fall sharply, Yip added.

(HK Edition 09/01/2009 page4)