Forecasting strong economic growth on the mainland over the medium to long term, HSBC said diversified exposure to mainland shares will help to maximize potential return and lower portfolio risk, with the domestic consumption and private sectors being the key investment theme for 2010.

While the mainland market could be volatile in the short run, fundamentals will remain strong to lead global economy, said Bonnie Lam, a director at HSBC Global Asset Management. "As domestic growth is a government priority, consumption should play a leading role in driving the economy," Lam said at a press conference that introduced a fund that covers different classes of mainland shares.

Lam said due to a heavier exposure to consumer-related sectors, small capitals and P-chips, run by private sector businessmen while listed in Hong Kong, should be in a better position to capture the growth potential.

The fund managers that managed the fund elaborated on the prospects of mainland shares. Alina Chiew, Managing Director of Goldman Sacks Asset Management said stocks with attractive valuations, strong franchise and secular growth prospects are preferred. She said although the target for the credit supply 0n the mainland shrank 2 trillion to 7.5 trillion yuan this year compared to 2009, the fast growth momentum on the mainland will hardly be affected.

"The cut in the credit supply is less of a policy tightening, but the central government is trying to normalize the overheating of loans. As long as money circulation meets the need for economic growth, the amount is not low, even if it decreases from the previous year," said Chiew.

Liu Yang, chairman of Atlantis Investment Management (Hong Kong) said China's consumption will boom significantly in the coming 10 years, where domestic growth is about to play an important role in driving the economy. A likely appreciation of the yuan in the year is keeping the market outlook for the mainland positive.

Liu said that since privately-owned enterprises posted much higher earnings growth compared to state-owned enterprises, the key to success is to identify potential winners at reasonable valuations in the private sector.

"Besides beneficiaries of growth in domestic consumption, especially in rural and western regions, healthcare, service sectors including education, tourism, IT outsourcing and high value-added exporters are also the key themes of 2010," said Ke Shifeng, a director at Martin Currie Investment Management.

Ke said government spending, mass consumption, private investment and export recovery are the four engines driving the mainland's economy this year. He maintains that the yuan's value is on an uptrend into the long term, but that it will be gradual: about a 5 to 6 percent rise in the next 6 to 12 months.

(HK Edition 03/25/2010 page2)