Why Hong Kong’s Bull Market Will Last Into 2013

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A "bull run" in Hong Kong's benchmark Hang Seng stock index, one of last year's best performing markets in Asia, should last well into 2013 thanks to a brighter economic outlook and a rebound in mainland shares, analysts say.

Hong Kong stocks rose almost 23 percent last year in the face of fears about a "hard landing" for China's economy.

Francis Lun, managing director, Lyncean Holdings says he's upgraded his target for the Hang Seng to hit 28,000 from 26,000 this year, because of increased optimism about the outlook for the global economy following a deal by U.S. lawmakers this week to avoid a "fiscal cliff."

That's a nearly 20 percent rise from levels around 23,300 on Thursday.

(Read More: US Avoids Calamity in 'Fiscal Cliff' Drama )

"I think all the bad things that could happen have already happened like the collapse of Greece, the near collapse of Spain … there are positive signs that the U.S. economy is really improving," Lun said. "I think we'll see real improvement in the year – I think we're in the midst of a bull run," he said, referring to the Hong Kong market.

Monetary stimulus in the U.S., Europe and Japan should also flood Hong Kong stock markets with cash, according to Peter Lai, director, DBS Vickers Securities, who predicts the momentum will lead the index to test the 24,500 level in the first half of the year.

"We expect there will be wide swinging, though the trend is still going upwards as the global markets are flooded with funds owing to quantitative easing," Lai said.

The Hang Seng tied Japan's Nikkei 225 Index as the third best performing Asian stock market in 2012, behind Thailand's SET index and India's Sensex.

Jackson Wong, vice president, Tanrich Securities says that while the Hang Seng will probably hit a high point earlier this year, its performance in the second half the year is more difficult to predict.

"We are still waiting to see whether China is really recovering and how the fiscal cliff does in the U.S. and also the Europe crisis is still unknown," Wong said. "[The Hang Seng will] consolidate at a high level and then it will depend on how the data plays out."

Boost From Mainland Shares?

In contrast to last year's stellar gains on the Hang Seng, the Shanghai Composite was the worst performer of all major Asian benchmarks, ending the year with just a 3 percent gain.

But a 12 percent rally in December is leading market watchers to predict a turnaround for the Shanghai Composite this year, and analysts say this will bode well for the Hang Seng.

(Read More: Will 2013 Be the 'Break-Out' Year for China Stocks? )

"H shares – mainland shares – make up actually half or more than half of the valuation of the [Hong Kong] market, so if the A shares [Shanghai] do well – Hong Kong will do well," said Lun, who added that A shares have been a drag on the Hang Seng for the past two years.

Hong Kong listed stocks related to the urbanization theme in China and firms involved in domestic consumption, infrastructure, construction and property are likely to outperform in the first half of the year, according to Wong.

"Everything related with the urbanization theme… is going to benefit if indeed after the leadership change at the end of the first quarter, the Chinese government roles out concrete policies for China to sustain their growth," Wong said.

China embarked on a once-in-a-decade leadership transition in November. The process is expected to be completed by March, with expectations high for China's new leadership to unveil economic reforms to put the economy on a sustainable growth path.

(Read More: Changing China Special Report )

- By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu