A stock indicator shows the benchmark Shanghai Composite Index on Oct 24, 2015. [Photo by Xie Zhengyi/Asianewsphoto]

Analysts say selective buying could yield big returns, help investors reap long-term gains

Come 2016, cherry-picking the "bright spots" in China's slowing economy will be key to investors' ability to outperform the general A-share market that will stay volatile, analysts said.

Some market mavens still swear by the story that the A-share market will continue to rise on expected continued monetary easing and acute need for investment avenues amid a shortage of quality and safe assets. But the divergence in the Chinese economy, and anticipated fluctuations in global asset prices in response to Thursday's interest rate hike by the United States Federal Reserve, could intensify volatility in the A-share market.

"The outlook for various sectors is diverging. For instance, climate indices for pharmaceuticals and food manufacturing remain resilient while the indices of investment-driven sectors like coal and steel are weak," said Wong Chiman, a strategist at China Galaxy International Securities in Hong Kong, in a research note.

"Our A-share macro team does not expect to see a clear secular trend in 2016 ... Therefore market timing and sector picking will be key factors to outperform," Wong said.

Analysts have highlighted themes including "Big Health" and "Beautiful China" which will likely generate more investment opportunities, as China will have to deal with an aging population and severe environmental pollution during its economic transition.

Investors will likely chase stocks of companies in the media, entertainment, and technology sectors as well as those that will benefit from the "supply-side" reform, which is aimed at enhancing industrial efficiency and competitiveness.

"Reform" will remain the buzzword that will interest investors, but the gap between expectations and reality could still give the market the jitters.

"Reform will be the most important variable that could affect the stock market in the coming year as a slowing economy has become a certainty that is fully factored in by investors," analysts at Huaan Securities Co said in a report.

The brokerage warned that 2016 will be a "difficult year" for stock traders as the side-effects of Beijing's bold reform agenda are expected to inject uncertainty and volatility into the market. The painful process of closing down inefficient and excess industrial capacity, slowing corporate earnings and profits, banks' rising bad loans and an expected expansion of new share supplies next year could all destabilize the A-share market, it said.

The consensus among economists and analysts is that 2016 could prove discouraging for the Chinese economy as GDP growth could slow to around 6.5 percent, and more monetary easing may have lost some of its ability to stimulate the economy.

Hong Hao, chief strategist at investment bank BOCOM International Holdings Co, said that an environment of sustained ample liquidity will not necessarily push the stock market higher.