The Hong Kong market, with its US dollar-pegged currency has suffered more than most markets worldwide from rising US in-terest rates, but in the long term most analysts are bullish.

David Semple at Peregrine Asset Management in Hong Kong thinks that people are reacting too negatively to the prospect of US interest rises" and adds: "Most people are looking at a rise of about 50 basis points. However the property developers have taken a hammering and are down substantially from their peak.

"The earnings potential for these property companies is at least as good now as at the be-ginning of the year." he says.

Lynda Johnstone, fund manager Far East with Guinness Flight, says the drop in the market comes from the Fed's rate rise and secondly because of measures taken by the Hong Kong government to reduce property speculation and increase supply which halted the bull run in property in the fourth quarter of 1996.

Philip Niem, head of re-search at James Capel in Hong Kong points to US in-terest rates if they go up faster than expected impacting on corporate profits. He adds: "If the long bond rate goes up, that can have an impact on liquidity in equity. The market has been quite highly correlated with the long term bond, but not that correlated with the short term rate on a month by month basis."

He also points to certain political risks in China with the prospect of personnel changes at the forthcoming People's Congress, while short term property in Hong Kong itself could surprise on the downside.

Johnstone predicts further volatility in the short term, while holding out the pros-pect of a rally from handover euphoria and the fact that China will want to see a smooth transition.

She says that Hong Kong's economy should be viewed in the context of China where inflation is down from over 27% in 1994 to under ten today.

Semple is largely in agreement. He points to a pick up in the Chinese economy which is dragging Hong Kong along with it, something that contrasts with the rest of Asia.

He points to other important events for China: the IMF/World Bank meeting in Hong Kong after the handover, possible entry for China to the WTO, MFN status under review, and the forthcoming People's Congress. In addition China is thought to be going to sign one of the UN's two charters of rights.

He adds: "China has to be careful with MFN coming up for review. It has become a domestic issue in the States because of the funding of the Democratic party."

There have been concerns expressed in the US about the handover, but Semple asserts that people in Hong Kong are most concerned with the business environment.

In terms of sectors and types of shares, Niem says: "We are looking at the Red Chips, we like selected conglomerates, utilities and also the banks."

Semple recommends the Pink Chips - the H shares which are China shares registered in Hong Kong - and the Red Chips - Hong Kong companies with substantial business on the mainland. He believes that these stocks will continue to perform well even though they are already highly rated. He says: "They don't stand up to fundamental analysis at the moment because it is all about anticipating asset projections."

He also recommends property developers, stock picking of property investors and the banks, despite the fact that they are facing a bit of a margin squeeze. They should see asset growth from China.

Johnstone backs the utility sector during the current vol-atility. "It has been a strong performer and we back it as long as uncertainty continues over rates. We are not too enthusiastic about property. Otherwise we like the red chips."

Guinness Flight's target for the index this year is 15,000. The market is currently at 12,400 and fundamentally Hong Kong looks very att-ractive. The p/e ratio is currently below 12 but earnings are expected to grow 15% this year and Johnstone expects a re-rating.

Niem agrees both on earnings and on re-rating. ""We are going for a 20% upside this year,"" he concludes."

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