HONG KONG: In 2010, the global economy is still in the early stage of recovery. We expect the second half of the year will be clouded by expected exit strategies and potential hyper-inflation.

With economic recovery continuing and corporate earnings improving, some degree of optimism about the global economic outlook may be warranted. However, that doesn't mean there isn't any worry any more.

The question whether the economic recovery can sustain its momentum remains unanswered.

The strong rebound in the latest data was partly attributed to the low comparative bases in the final quarter of 2008 and the first two quarters of last year when the global economy plunged to the valley after the onset of the financial tsunami in September 2008.

The concern about the sustainability of recovery is partly due to the likelihood of inflation in the future after quantitative easing by governments around the world flooded the market with high liquidity.

Moreover, potential adjustments by central banks worldwide in their monetary policies will also have strong implications for the economic outlook.

The global economy will likely face a real challenge in the second half of the year. If monetary authorities worldwide do decide to implement an exit strategy - a process to tighten liquidity in the market - then the sustainability of economic recovery will be put to the test. This is going to be the most significant test for the economy.

That said, the outlook for the stock market in the first half of the year remains bullish as economic data and corporate earnings continue to improve robustly while liquidity remains ample.

Share prices could push up further after a strong rally in the second half of last year. The benchmark Hang Seng index may test the 26,000-point level in the upside.

A relatively aggressive strategy is favored for the first half of the year. However, investors should practice prudence in selecting stocks, given the underlying worries about the economic outlook for the second half.

Investors should prefer laggards such as telecommunication operators, shipping firms, airlines operators and mainland property developers, who have a good chance to catch up this year.

Meanwhile, investors should avoid high-fliers - stocks that have climbed significantly last year and whose valuations have been stretched - such as mainland banks, automakers and appliance makers.

For the second half of the year, investors should take a relatively conservative strategy with their investment as the equity market will likely turn more volatile amid worries about exit strategies and hyper-inflation.

Louie Shum is the CEO of Sincere Securities Limited. This story was originally published in the February 2010 issue of Bauhinia Magazine. Edited and translated by George Ng of China Daily

(HK Edition 02/23/2010 page2)