Investments in mainland small-cap stocks could be unexpectedly rewarding this year after dropping 38 per cent in 2011, analysts said.
Macquarie Securities said in a report that mainland small caps were set to perform strongly this year, with favourable conditions expected from credit loosening. Firms with small market capitalisation bore the brunt of Beijing's credit-tightening policies last year as borrowing costs shot up.
Some mainland firms, heavily shorted going into accounting season in March, will be lifted by immediate short covering when their corporate governance proves to be sound.
Kenny Lau, head of small cap research for Asia ex-Japan at Credit Suisse, said the hardest-hit sectors - including industrials, exports, information technology, materials and transportation - could outperform this year when the market recovers.
He said these sectors had already priced in market uncertainty and could only perform more solidly.
Hong Kong property stocks have already priced in the anticipated fall in property prices this year and things may only get better, according to Hong Kong research head Cusson Leung at Credit Suisse.