Investor confidence in Hong Kong remained stable in the third quarter 2013, with the J.P. Morgan Investor Confidence Index steady at 116 points. But the high hopes they have for the mainland China market may be misplaced, says one fund manager.

Retail investors are most optimistic towards performance of locally-listed stocks, with 73% of respondents expecting the Hang Sang Index to trade above 23,000 points six months from now. The outlook for the global economic environment, on the other hand, slipped slightly.

"It is reassuring to see another stable quarter in terms of investor sentiment, especially when compared to this time last summer," said Henry Tong, vice-president of intermediary business at J.P. Morgan Asset Management (JPMAM). The index had hit a three-year low at 103 points in June last year.

"It is the global situation which is still causing the most concern," added Tong. "The Global Economic Environment Sub-Index has been the lowest rated confidence index for around three years and this will more than likely continue in the medium term at least." Hong Kong investors view Europe and the US as the overseas markets that exude the most risk.

Tong noted increasing interest in equities as an asset class, being overweight in the portfolio allocation of 15 percent of respondents. This comes largely at the expense of fixed income products, which have witnessed US$1 billion net outflows since the beginning of the year in Hong Kong, he added.

While a strong home bias benefits the Hong Kong market, more than half of investors believe mainland China is the market that holds greatest potential for growth this year and 70% naming it is as one of the top two markets globally.

"China is attractive to Hong Kong investors, mainly because economic activity has been picking up again in recent months after Beijing pledged to keep growth of at least 7 percent," commented Grace Tam, global market strategist for JPMAM.

Nicholas Yeo, director and head of China/HK equities at Aberdeen Asset Management, also observed a rebounding stock market in China as a result of improving macroeconomic data. However, he cautioned, "while it is true that valuations in China are lower and look relatively attractive, the question is whether they command anything higher."

Yeo said a "lack of quality" among listed Chinese companies, particularly concerning state-owned enterprises. In a recent study by the Asian Corporate Governance Association, China ranked ninth of 11 Asian countries in terms of corporate governance rules and practices. According to Yeo, minority shareholders still find it difficult to have any say in corporate decisions. This is unlikely to change in the immediate future.

"Investors have to be patient. Hong Kong remains our conduit of choice for China exposure until we see better corporate governance standards in China," he remarked.

Source: http://www.theasset.com/article/25354.html#axzz2iiMAmoV6