Backed by accelerated economic growth and favorable policies, equity markets on the mainland as well as in Hong Kong are poised to rally next year, Goldman Sachs reckons.

"Chinese equities will have a pretty good year in 2013," Kinger Lau, regional/Hong Kong strategist at Goldman Sachs told a press conference on Tuesday.

The investment bank forecasts the CSI 300 to rise by 26 percent next year from where it is now; while expecting Hang Seng Index to reach 25,000 by the end of 2013.

Lau said that the Chinese equities have solid fundamentals, as the economic expansion in China is expected to recover from 7.6 percent in 2012 to 8.1 percent in 2013 and potentially further improve to 8.4 percent in 2014.

Benefiting from a stable growth on the mainland, the economic growth in Hong Kong is also expected to see a strong rebound next year. Goldman Sachs predicts that the city's GDP growth is to accelerate to 3.7 percent in 2013 from 1.2 percent this year.

Lau pointed out that the improvement in macro economic growth momentum is certainly very positive to equity markets, as it will help to support corporate earning growth.

Aside from fundamental reasons, Goldman Sachs also sees the valuation of Chinese equities to be very attractive.

Based on the MSCI China Index, China is currently trading at around 9.7 times forward earnings, which is significantly below the historical average of around 12 times, said Lau, adding that investors are very conservative in terms of positioning in equities and there is abundant money sitting on the sideline.

Timothy Moe, chief Asia Pacific strategist at Goldman Sachs, added that the rally for both A shares and H shares is likely to be triggered by some signs of clear policy directions, particularly in terms of structural reform, which will probably come after the National People's Congress in March 2013.

The clarity or reduced concerns about the supply overhang would also be the trigger to boost the market, especially A-share market, said Moe, explaining that the equity markets on the mainland is very sensitive to primary issuances or the selling of lock-up shares.

Moe mentioned that there are about 800 IPOs in the pipeline, and there will be unlocking of a lot of previously restricted shares, which can cause concerns among domestic investors.

"If there is any sign of the regulators moderating the pace of new issuance, the market sentiment could turn very quickly and there could be a dramatic rally in the A-share market," he said.

Goldman Sachs said on the medium term bases, it likes insurance companies, healthcare companies, and railway constructers as well as some retail names in China.

Holding a similar view with Goldman Sachs, Bank of Communications Co also believes that China's stocks will perform better next year, thanks to the economy and liquidity improvements.

Hao Hong, managing director of research at BoCom, said in a report that Chinese stocks trading in Hong Kong are a better China investment proxy than equities listed on the mainland because of cheap valuations, no capital flow restrictions and an undervalued Hong Kong dollar.

The Chinese government should consider relaxing property purchase limits while increasing public housing supply to boost market confidence, he said in the report.

sophiehe@chinadailyhk.com

(HK Edition 12/05/2012 page2)