Hong Kong is set for a bullish market on the back of an economic rebound and mainland measures, brokerage firm BNP Paribas Peregrine said yesterday.

"The gross domestic product of Hong Kong is likely to grow at 3.5 per cent next year; and there is a possibility 2004 GDP will cross 4 per cent," Raymond Foo, BNP's regional strategist, told a news conference. For this year, its forecast remains at 0.9 per cent, mainly due to the impact of SARS, he added.

"There is a clear sign of recovery after seven long years of being at the bottom," Foo said.

The economy will be pushed up by a package of mainland stimulation initiatives including elimination of trade barriers under the Closer Economic Partnership Arrangement (CEPA) between Hong Kong and mainland; and an influx of mainland visitors, who are also big spenders, after the relaxation of the policy for individual travel, said Chiu Man-wai, head of Hong Kong research for BNP.

"As exports of merchandise and other trade services account for 14 per cent of GDP, while tourism accounts for another 6 per cent, you can see how important these mainland initiatives are to Hong Kong's economy," said Chiu.

Meanwhile, new business opportunities will be created when Hong Kong serves as an offshore renminbi centre, he added.

BNP also turned "overweight" on Hong Kong equities for the first time in nearly four years.

"The consensus is bearish and the market has underperformed. This is usually a good, and necessary, reason to turn positive on the market," said Foo.

BNP has raised its year-end forecast for the benchmark Hang Seng Index to 11,408 from 10,600. Fu said domestic plays could gain 20 to 25 per cent in the coming 12 months given high domestic and external liquidity.

The Hong Kong market has risen only 10.7 per cent this year against the 20.1 per cent rise for the MSCI Far East, said the latest BNP study.

Property stocks will lead the market, which recorded a poor performance in the first half of this year, rising just 8.6 per cent compared a surge of 49.9 per cent for export and industrial stocks, said the company.

"Residential property prices would rise 10 per cent next year with the easing of supply, restored confidence in the local market and an influx of capital from mainland," said Adrian Ngan, a BNP property analyst.

BNP recommended overweight on property development stocks, banking stocks, conglomerate stocks and aviation stocks, while suggesting investors switch out of exporter and utility stocks. It has set the 12-month target price for leading developer Sun Hung Kai Properties at HK$58.24 and for Cathay Pacific at HK$14.65.

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