Shanghai stocks will likely face more uncertainties and downward pressure this week as investors grow cautious about likely measures and also on fears the upcoming launch of stock index futures may see the market correcting more deeply.

But market observers believe that the downside room may be limited as liquidity is abundant. However, they warned investors against building up too heavy positions as volatility is set to increase.

The Shanghai Composite Index, which covers yuan-denominated A shares and US dollar B shares, climbed 3.37 percent last week to close at 5,777.81 on Friday. Weekly turnover hit 517.5 billion yuan (US$69.2 billion), down from 521.8 billion yuan a week before.

The benchmark index rose a combined 6.53 percent in the first three trading sessions last week and temporarily breached the 6,000-point mark before profit taking set in to send the barometer to as low as about 5,700.

"It's a market of uncertainties," said Wu Mingcheng, a Citic Securities Co trader. "People are now divided on whether valuations are too high. But they apparently are turning more cautious about pushing the index even higher."

Most economists and analysts expected the central bank to raise interest rates for the sixth time this year in the coming two months and to sell more bills and bonds to soak up cash available for investment.

In addition, the country's first stock-index futures, to be based on the index tracking the top 300 mainland-listed companies by market value, will likely be unveiled at year's end, which analysts say may increase volatility.

"As the launch of the index futures approaches and sales of new stocks may accelerate, the market is seeking a balance as volatility increases," said Han Wenhai, a Donghai Securities Co analyst. "We advise investors to wait for clear signals."

Some market watchers noted that investors should take defensive strategies toward the end of this year, focusing on sectors with relatively low valuations such as banking and property which have fallen recently.

"Besides blue chips, closed-end funds should also be considered as an investment choice as they are now traded at high discounts," said Chen Jinren, a Huatai Securities Co analyst.

(Shanghai Daily November 5, 2007)