Nomura says the macro backdrop for HK equities will stay impressive in 2011, because the negative real interest rates, a buoyant current account and ultra-low U.S. interest rates are set to keep asset prices well bid. Though the house expects increased government intervention in the residential property market to push liquidity into other sectors, it says the equity market is trading at close to long-term valuation levels and expects its earnings growth to be about 16% in 2011. The house has set its 2011 year-end target for the HSI Index at 28,000 and recommends buy on Sun Hung Kai Properties (Hong Kong stock code 0016), Swire Pacific (0019), Pacific Basin (2343), Cathay Pacific (0293) but suggests reduce HK & China Gas (0003).

Nomura also says it is positive on the outlook for China’s equity markets in 2011. The house has set its year-end target for the HSCEI Index at 16,000. It sees index performance being backed by: 21%+ earnings growth, with large-cap sectors such as Financials and Energy on course to deliver strong earnings; attractive valuations (13x FY11 earnings, in line with the past 10-year average, and 2.5x price/book with RoE of 20%); and a positive liquidity outlook. The house believes fundamentals will provide the surest footing for stock pickers in 2011. Sectors with improving earnings prospects and strong RoEs are best placed to scale the heights, particularly when there are uncertainties on the policy front and the cost of capital is on the rise. While concerns over high inflation could weigh on equity market performance in the short term, we recommend investors position themselves for resulting buying opportunities, since historically the market tends to rally once inflation has peaked out, Nomura said. The house’s 10 stocks for 2011 are Agile Properties (3383), ABC (1288), China Everbright International (0257), China Life Insurance (2628), China Mengniu Dairy (2319), CRCC (1186), Gome (0493), Perfect World, Sinopec (0386) and ZTE (0763).