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Stock market investors are expected to enjoy a reasonable return in 2007 after some handsome gains this year, even though the markets are likely to be more volatile, say  investment experts.

'Asia markets, particularly Hong Kong and the mainland, will continue to perform well, at least in the first quarter,' said Andrew Fung, deputy general manager and head of investment and insurance at Hang Seng Bank.

The regional markets would be supported by healthy economic growth and continued fund inflows, especially to the mainland, on expectation of yuan appreciation, he added.

Most equities markets touched record highs this year, led by emerging markets such as the mainland, whose Shanghai A-share market surged  101.85 per cent to 2,343.67, as of December 22.

In Hong Kong, the Hang Seng Index has risen 29.87 per cent this year to 19,320.52 (22/12), while mainland-related H shares  surged 79.97 per cent to 9,593.07.

Even mature markets like the US Dow Jones have increased by 15.89 per cent this year to 12,421.25, as of December 21.

Paul Pong Po-lam, managing director at Pegasus Fund Managers, expects the Hang Seng Index to reach the 22,000 level next year, while the H-share index could be up to 13,000. The A-share index may see another 50 per cent jump next year, he said.

'It would be better investing in the equity market next year than bonds and holding cash,' Mr Pong said.

He said the friendly investment environment in equities would likely  continue this year with China and India remaining the focus of the Asia region.

However, he warned that the markets would be more volatile next year, and investors should be more careful  in the timing of their investments and stock picks.

Despite the rosy outlook, analysts including Daniel Chan Po-ming, senior investment strategist at DBS Bank (Hong Kong), said the markets might suffer from some corrections if the US economy slows faster than expected. However, Helen Ng, managing director at the private banking unit of JP Morgan, expects the world's largest economy to still manage a soft landing.

The bank forecast the US economy would slow to 3 per cent in 2007 from 3.3 per cent this year, due to high energy costs and a weaker housing market, although the labour market would remain firm.

Ms Ng expects the US stock market to rise about 8 per cent to 9 per cent next year amid some volatility.

She also expects economic growth in Asia outside of Japan to be about 7 per cent next year, while the mainland, where the economy is growing at around 10 per cent at present, to lead fund inflow to Asia. JP Morgan forecast total returns of 'mid-teens' in most Asian markets in 2007.

In terms of investment strategy, Ms Ng said her bank would continue to advise its clients to diversify their portfolios next year.

'Europe and Asia are our top-picks,' she said.

Mr Fung at Hang Seng Bank, on the other hand, suggested that investors with an aggressive approach could look at initial public offerings of mainland enterprises and H-shares with good fundamentals.

Investors with a modest approach could consider putting money in index funds if they were concerned about the current high share prices, he said.

Although the US Federal Reserve has already put the brakes on interest-rate hikes, Mr Fung said the bond market was still not attractive enough.

'The US interest rate cut is unlikely [to happen] in the first quarter, while short-term interest rates are still higher than the long-term rates,' he added.

If investors are keen to hold bonds, Ms Ng said they should consider buying short-term bonds maturing in two to three years.

On currency investment, Mr Fung said although foreign exchange traders generally expected the US dollar to further depreciate, most major currencies like the euro and sterling had gained quite a lot this year, and investors should be careful not to buy when a currency peaks.



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