Hong Kong stocks seen set for a fall in 2008

HONG KONG (Reuters) - Hong Kong share prices are now expected to be down overall this year as the global credit crunch takes its toll, according to the latest Reuters poll of analysts which shows a big reversal from forecasts made just three months ago when impressive gains were expected.

Hong Kong's Hang Seng index .HSI is expected to end the year down 8.3 percent at 25,500 points, according to the median forecast given by 16 analysts polled last week. That compares with a forecast of 34,000 points given in the last poll conducted in December.

It would be the first year of decline since 2002 and contrasts sharply with the 39 percent gain made last year. But analysts varied widely in their latest Hang Seng forecasts, with the lowest projection 20,000 points and the highest at 30,000.

The forecasts were taken before JPMorgan Chase bought ailing investment bank Bear Stearns at the weekend and the U.S. Federal Reserve extended lending directly to securities firms for the first time since the Great Depression.

Three months ago analysts expected the Hang Seng, the world's seventh-largest index by market capitalization, to reap double-digit gains. But their optimism has withered away as credit losses related to risky mortgage bets pile higher.

The Hang Seng, down 24 percent so far this year, is taking punches from two sides.

It is contending with the fallout from the global credit crisis and a looming U.S. recession. And it must also deal with the uncertainties of the Chinese economy and Beijing's attendant policy decisions.

After a year of tightening, China's dizzying economic growth rate of recent years could abate, with growth also exposed to a slowdown in consumer spending in the United States, a major market for Chinese exports.

"China, of course, is the biggest risk to the downside," said Andrew Look, Hong Kong strategist at UBS.

"The macro tightening imposed a year ago is beginning to filter through the system; the weaker U.S. consumer demand has a direct impact on Chinese exports."

But no one is sure if Beijing is ready to ease its tightening stance, given the country's inflation jumped in February to a near-12-year high. Indeed, many still say the next move is to tighten policy further, and possibly soon.

The projected decline in the Hang Seng index comes after the Hong Kong market breached successive records at such a rapid rate last October that many analysts gave up on trying to make forecasts.

But among the more bullish some say the Hong Kong index -- which currently trades at between 14 to 15 times 2008 earnings, compared to its historic norm of 12 to 18 times -- is looking attractive.

Hong Kong's own economy has been helped by a negative interest rate environment where residential property price rises outpace mortgage rates, boding well for the property market, a key pillar of the city's economy.

"We remain as optimistic as anyone on the outlook for the residential property market," said Tim Rocks, Asian equity strategist at Macquarie.

But while emerging markets are backed by robust economic growth, fresh credit woes in the wake of Bear Stearns' BSC.N distress sale to JPMorgan Chase will trigger mass sell-offs.

"The fundamentals for Hong Kong are strong, stronger than some other markets in Asia, particularly northern Asian markets," Rocks said.

"But nevertheless, Hong Kong can't help but get caught in the global maelstrom," he added.

(Editing by Greg Mahlich)