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Year of the Horse: China to gallop into historic gains?

Image Source | Getty Images

Under the rules of the Chinese zodiac, 2014 will be the 'Year of the Horse,' and according to research firm Jefferies, it will be the year that the world's number two economy releases its full potential.

In a China equity strategy note published over the weekend, the Jefferies analysts describe how the raft of reforms unveiled following the Third Plenum meeting of the Communist Party earlier this month will boost confidence in policy makers' ability to drive reform and a trigger a historic bull run for equities.

"A journey of a thousand miles begins with the first step. With a clear path to prosperity in sight, we believe China will gallop into a historic multi-year bull run," said the Jefferies analysts.

(Read more: At last, China stocks get something to shout about)

2013 has been a volatile year for Chinese investors as they attempted to navigate uncertainty over policy makers' agenda and fears over slowing growth.

Hong Kong's Hang Seng index is just 4.5 percent higher than where it started this year, while the Shanghai Composite has lost 3.6 percent year to date. This compares to the MSCI Asia-Pacific index which is up near 10 percent in the same period.

A historic Communist party meeting which took place earlier this month has provided some optimism that 2014 might bring more certainty and therefore better returns for investors.

Following the meeting, policy makers unveiled a 60-point reform plan, which includes the relaxation of its one-child policy, along with changes to its welfare system, more rights for farmers, increased financial reform and steps towards opening up of its state-owned enterprises (SOEs).

(Read more: China's economic reforms:What you need to know)

According to Jefferies analysts, Chinese policy makers have made efforts to reform in the past, but haven't been as successful. This time round there is more reason to be optimistic, they said, meaning next year will mark the beginning of a new era of profound change.

"We believe President Xi has consolidated power, removed obstacles and established the political mechanisms to push through reforms," read the note.

(Watch now: China reforms to lift market valuations: Stanchart)

"We believe the creation of a Central Reform Committee (likely to be chaired by Secretary Xi) under the Party (not the government) is critically important. We believe this committee will be able to cut through calcified bureaucracies and vested interests to get things done," they said, adding that the reason why other governments haven't been as successful with their reform plans in the past was due to their inability to cut through these vested interests.

As a result, Chinese stocks are now poised for a strong rally towards the end of this year and into 2014, the note said. Jefferies declined to give specific forecasts, but said they expected the country's equity market to generate modest double digit growth in 2014.

(Read more: Another false dawn for Chinese stocks?)

"As expected, policy uncertainty has made 2013 challenging for equities... 2014 will be different, in our view. We believe policy consensus has been reached and markets will gain strength with reform clarity and confident implementation," they said.

Jefferies recommended investors bought stocks in sectors including airlines, autos, banks, brokers, consumer staples, health care, insurance, internet, clean energy and retail property, and sold stocks exposed to industrials, metals & mining, residential property, shipping.

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

Contact Asia Economy

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