Analysts said investors will be attracted back to emerging markets as they hunt down short-term speculative gains. Daniel J. Groshong / Bloomberg

The current capital outflow from emerging markets - and Hong Kong - could reverse itself in the second half of this year, some fund managers believe.

They said Friday that such an occurrence would help to shore up the Hang Seng Index to level as high as 28,000 points.

The local benchmark index has dropped 8 percent since November when it almost reached 25,000. Meanwhile, the Dow Jones Industrial Average has gained nearly 8 percent to a two-year high during the same period, indicating an on-going capital flow from emerging markets to developed ones, fund managers said.

Paul Pang, managing director at Pegasus Fund Managers Limited, said investors have been pulling money out of emerging economies because they are concerned about anti-inflation measures such as interest rate hikes. Meanwhile, better-than-expected economic indicators in the developed world have eased their nerves, prompting the capital flow.

Separately, the People's Bank of China announced its latest rate action on Feb 8, raising its benchmark interest rate by 25 basis points for the third time since mid-October, as it stepped up its efforts to curb inflation. The Indian central bank also raised its policy rate by 25 basis points on Jan 25.

"However, this phenomenon will be temporary, the long-term trend of capital flowing to emerging markets will continue. We will see capital flow back in the second half of 2011, contingent on how policy makers in the emerging markets handle the inflationary pressure," said Pang.

Chan Pui-man, director of the asset management department at Quam Securities Company Limited, also believes that the recent plunge in the Hang Seng Index reflected capital outflows to developed markets such as the US.

"But the impact will be limited and short-term," Chan said.

She forecast that as the earnings reporting season comes into full swing by March, investors will be attracted back to the local stock market as they hunt down short-term speculative gains.

Chan thinks the Hang Seng Index will trade within a range from 22500 to 22800 points in the near term, with the upside potential to hit 23,800. For the full-year peak, she thinks that the benchmark index has a chance of hitting 28000 points - if companies are able to realize 10 percent earnings growth.

Pang from Pegasus estimated that Hang Seng Index will move within a range of 22500 and 24000 points in the near term. He predicted that the index could surge to a full-year peak of 28000 in the second half of 2011.

In terms of 2011 investment strategy, Pang suggested investors seek exposure in markets that face very little possibility of interest rate hikes, such as the US and Hong Kong.

Financial stocks in the US have robust growth potential and are experiencing a turnaround. Hong Kong-listed mainland banks will enjoy steady earnings growth, providing long-term growth, according to Pang.

Chan recommended a more defensive investment style, which means handpicking stocks currently undervalued and ignored by the market. Locally listed choices could include real estate investment trust, mainland utilities such as Huaneng Power, mainland banks such as China Construction Bank - as well as real estate developers focusing on second-tier cities like New World China.

China Daily

(HK Edition 02/12/2011 page2)