24 October 2016
UBS sees dark skies above the Hong Kong stock market. Photo: Wired
UBS sees dark skies above the Hong Kong stock market. Photo: Wired

UBS slashes forecast for Hang Seng Index by 25%

UBS Group AG lowered its target for Hong Kong’s benchmark stock gauge 25 percent, saying its worst-case scenario for the city is coming true as the economy weakens and tourism arrivals decline, Bloomberg reported  Friday.

The Hang Seng Index will slide to 19,775 as slowing growth in the city and China weigh on corporate earnings, UBS analyst Spencer Leung wrote in a report dated Sept. 2.

That’s a 5.5 percent drop from Thursday’s close and implies a 16 percent decline for the year.

In December, UBS’s target for the end of 2015 was 26,484, and the 19,775 level was the “black sky” of four possible outcomes.

“On the back of slower economic growth in China and more signs that a US rate hike is approaching, we believe the current valuation of Hong Kong equity may not be attractive enough to compensate for potential earnings downside,” Leung said in the report.

“Our black-sky scenario could be a better portrayal of the challenges in the current environment.”

Hong Kong stocks are being buffeted by a global sell-off, China’s equity rout and a downturn in tourism that’s hurting shop rents and retail sales.

The Hang Seng Index entered a bear market last month and is the developed world’s worst-performing stock gauge this quarter.

While valuations are becoming more attractive, they’re still too high given the worsening outlook for earnings, Leung said.

Hong Kong company profits will tumble 31 percent next year from a year earlier under the black-sky scenario, he wrote.

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