Lingering uncertainties over Taiwan's election and security fears world-wide are expected to discourage investors and weigh on Hong Kong shares this week.
The election's effect on the stock-market in Hong Kong would depend on China's reaction and whether supporters of defeated presidential contender Lien Chan stepped up demonstrations, traders said.
"Taiwan's election turmoil will hit the already weakened Hong Kong stock-market, because investors will use political uncertainties as an excuse to sell equities," said Herbert Lau, a research director at Celestial Asia Securities.
The benchmark Hang Seng Index ended at 12,790.58 on Friday, down 1.1 percent on a week earlier and wiping out nearly all the gains made so far this year. Traders expect the index to lose another 100 points on Monday and shuttle between 12,500 and 13,000 during the week.
Incumbent Chen Shui-bian won Taiwan's presidential election by the thinnest of margins on Saturday, a day after he was shot.
The narrowness of the victory created the island's worst political crisis in years as Nationalist Party leader Lien demanded the election be declared invalid and requested a recount.
What concerns investors most will be Beijing's reaction to the return to office of the candidate it loathes. Chen's re-election might also encourage activism by Hong Kong's democracy movement, further antagonising Beijing.
"The political tension in the Greater China region will escalate," said Ben Kwong, an associate director at KGI Asia Ltd.
"The only good news is Beijing can now breathe easier because Taiwan voters rejected of the island's referendum."
The referendum, which failed because less than half of the electorate took part, asked whether Taiwan should beef up defences if China refused to withdraw missiles aimed at the island and whether it should hold talks with the mainland.
Beijing considers Taiwan a part of China that must be recovered, by force if necessary.
Since most Hong Kong's blue chip companies have announced results for their latest period, investors may seek direction from Wall Street, which kicks off the reporting season this week. The United States is Hong Kong's second-largest export market.
Investors will also keep a wary eye on security threats around the world, as terrorism fear has been rekindled since bombings in Madrid this month.
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