Hang Seng Index has outperformed its global peers with a gain of 28.4% in the firstten months of the year fueled by stronger-than-expected GDP growth in China,improvement in corporate earnings and inflow of funds from China via Shanghai-HKand Shenzhen-HK Stock Connects. However, current valuation of the Hang SengIndex at historical P/E of 15.3x is no longer cheap compared with 10-year and 20-year average of 12.5x and 14.4x respectively. An overwhelming market response inthe IPO of China Literature (772) showing Hong Kong’s stock market has beenoverheated. We believe short-term investors will tend to take profits so that furtherupside for Hang Seng Index will be limited in coming two months. Nevertheless, wereiterate our view that HSCEI, a benchmark for Chinese stocks, will continue tooutperform the Hang Seng Index for the rest of the year on the back of improvingfundamentals.

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