While most market watchers expect Hong Kong stocks to have another stellar year, Citibank anticipates the benchmark Hang Seng Index to fall to 29,500 by the year end, down 3 percent from the current level, citing tightening global monetary rates and unpredictable geopolitical risks as the biggest threats.
However, the bank expect A shares to outperform Hong Kong stocks and international investors to boost holdings of China's domestic stocks, helped by MSCI's addition of A shares to its key emerging market index in June.
Hong Kong topped global major stock markets in 2017, as the HSI soared 36 percent on corporate profit and abundant fund inflows from mainland China. Brokerage firms widely expect the index to rise further in 2018, with the most bullish forecast by Morgan Stanley at 37,600.
On Tuesday, the first trading day of the year, the HSI advanced 1.9 percent to 30,476.61 in afternoon trading.
Nonetheless, Citi's analysts are less optimistic. They expect the HSI to post a slightly negative return for 2018 and reach 29,500 by the end of the year.
"We are relatively conservative about Hong Kong stocks, as some risk factors haven't been priced in yet and will have an impact on Hong Kong market in 2018," said Pak Ling Wong, head of investment strategy and portfolio management for Citibank Global Consumer Banking, on Tuesday.
This year is likely to see a simultaneous tightening by major global central banks, as they prepare to wind down stimulus and end the era of easy money.
Wong expects the Federal Reserve to raise interest rates three times in 2018, and sees other major central banks slowly scaling back stimulus measures.
Hong Kong tracks US interest rate policy, as the city's currency is pegged to the US dollar.
But the city's major banks have not fully matched the Fed's interest rate moves by raising their prime lending rates.
"Hong Kong's interest rates will inevitably go higher if the Fed hikes again this year," Wong said. "The pressure to keep up with the US is just going to get bigger and bigger. "
Meanwhile, geopolitical uncertainties will also be a threat, as the current index level does not reflect risks from North Korea.
The analyst predicted the Hang Seng China Enterprise Index, or the H-share index, to rise to 13,500 by the year end, a 12 per cent upside from its current level.
By sector, Hong Kong banks and Macau casinos could outperform.
In China, A shares are heading for a strong year, as MSCI China Index is likely to hit 108 in 2018 from the current level 89.35 for a full-year return of 21 percent, Wong said.
"We prefer A shares to Hong Kong stocks."
He said gains will be fuelled by China further opening up its market and integrating with the global economy, helped by the Belt and Road Initiative and the rise of its new economy industries, such as technology, e-commerce and consumer staples.
He suggested investors go overweight in sectors such as information technology, consumer discretionary, and health care.
"We expect two-way cross border fund flows will accelerate and international investors will boost their weightings in A shares, especially after MSCI adds China's domestic stocks in its emerging market index in June."
With additional reporting by Alice Shen.
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