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Hong Kong Stocks - Down but Not Out

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One of Asia's top performing equity markets last year Hong Kong has so far underperformed in 2013, but analysts told CNBC that the Hang Seng index - which is a play on China's growth story - will get its mojo back before the end of the year.

The Hang Seng, which closed last year 20 percent higher, is down almost 0.6 percent year to date. It was trading 1.54 percent lower by late afternoon on Monday.

According to Francis Cheung, head of China and Hong Kong strategy at CLSA Asia-Pacific markets, the pullback this year on the Hang Seng has been driven by profit taking and a re-evaluation of the Chinese growth story.

(Read More: China's Recovery Seen Tepid After Worst Year Since 1999)

"What we have seen this year is people taking profits and people starting to re-evaluate growth in China," he said.

Cheung said growth in China might not be as strong in 2013 as investors expected last year. CLSA's forecast is 7.8 percent for 2013, 40 basis points below the consensus forecast of 8.2 percent.

However, despite his more bearish growth forecast, he still expects the Hang Seng to outperform mainland China stocks this year.

"Hong Kong will do better. The reason is that the domestic China market has a lot more liquidity issues. Its bond market is doing well and that is taking away from its equity market performance," added Cheung.

(Read More: China shares slump on liquidity drain, real estate concerns)

"Hong Kong did a lot better last year, so it could be a case of Hong Kong investors responding faster to fundamental drivers than mainland China investors," said Shuang Ding, senior China economist at Citi Investment Research and Analysis.

Despite the plunge on Monday on the Shanghai Composite owing to the new property curbs, the index is up 0.47 percent year to date. It was trading 3.38 percent lower by late afternoon on Monday.

China saw a broad turnaround in sentiment late last year following the announcement of China's fresh leadership regime, prompting a sharp rally on both stock markets.

Hang Seng 1 Month Chart

But going forward, analysts foresee a Hong Kong market rebound, as it offers, among other things, greater accessibility to foreign investors looking to play China's growth. In addition, the market is more tuned into the global economy, while investors in mainland China are more domestically focused, said Ding.

"Investors in Hong Kong tend to examine the leading [global] indicators more closely. Last year, they started to believe in the rebound story earlier than China, for example," added Ding.

Stephen Sheung, vice president and investment strategist at SHK Private in Hong Kong, also expects the Hang Seng to rebound over the next few months, as in his view, company earnings will surprise on the upside over the next few weeks.

"I would not call the recent losses on the Hang Seng a correction. I'd call it more of a consolidation. Now is a good time for investors to buy in ahead of this up-tick," he said.

Jackson Wong, vice president at Tanrich Securities, also sees the Hang Seng rallying this year.

He forecast the index will rise 7.5 percent by mid-2013 and by more than 15 percent by the year-end from current levels. He, however, added that was dependent on how the major economic headwinds, including the U.S. budget cuts, the euro zone crisis and China's new leaders' efforts to stabilize the economy, played out.

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