Despite an uncertain global economic outlook clouded by a faltering recovery in Europe and the slowdown in growth on the mainland, investment strategists at Standard Chartered Bank Ltd have posted a bullish forecast for Asian and European equities in the 2014 fourth quarter.

Leung Chun-fai, SCB's head of investment strategy, predicted on Tuesday that average returns from investments in Asian and European stocks will be higher than those from other asset classes, basing his forecast on confidence largely in "favorable government economic policies".

Although short-term volatility could hit individual markets in the coming months, he said: "We're still confident that the stock markets will offer a rather high rate of return compared to other asset classes."

The free fall of the Hong Kong stock market since mid-September reflected prevailing investors' concern about the patchy global economic recovery and the city's political uncertainties. The benchmark Hang Seng Index has shed 4.4 percent in the past month to a four-month low of around 23,000 points.

"The Hang Seng Index is expected to rebound to 25,000 within the next six months," Leung said. His enthusiasm, he said, is backed by "improved market sentiment and the galvanizing impact of the much-anticipated Shanghai-Hong Kong Stock Connect". He also said the mainland's structural economic reform and historical stronger performance are factors that can justify his bullish outlook for the fourth quarter.

What's more, the performance of A-shares has lagged behind most other markets in the past 18 months. As a result, prices of many blue-chip shares have fallen to levels with "buy" opportunities for many foreign investors, said Liao Qun, China CITIC Bank's chief economist and general manager of the research department.

The Stock Connect arrangement between the stock exchanges of Hong Kong and Shanghai is expected to attract a significant inflow of overseas capital to what many analysts considered to be a grossly undervalued A-share market. "We see potential for an upward adjustment in the prices of mainland equities," Liao said, adding that the long-anticipated stock rally has already begun on the Shanghai bourse.

However, some economists warned that rapidly changing economic conditions could sour investors' mood, causing stomach-churning price swings in coming months.

Looking further ahead, SCB maintains an "overweight" view on European stocks, citing a weakening Euro that could help boost exports, providing an upward momentum in equity prices.

Meanwhile, the US stock market looks "cheerful", Liao said, as the negative impact of the US Federal Reserve's withdrawal from its bond-purchasing activities has already been absorbed by the market, which is poised for a rebound on expectations of a prolonged low interest-rate environment.

selena@chinadailyhk.com

(HK Edition 10/22/2014 page9)