Liquidity increasing globally, but not enough to salvage the economy. The Eurozone and US are out of options for rescuing their economies and are printing money to devalue debt. Printing money is the cheapest solution. We therefore expect liquidity to loosen worldwide, but that fundamental recovery will take time.

China's economy to bottom in 1Q12, rebound in 2Q12. With China lowering its required reserve ratio, we think its economy will soon bottom. While the central bank has loosened up liquidity supply, corporate financing costs won't come down quickly. This is because it takes time for monetary policy to trickle down from the central bank to enterprises. Also, concerns about the economy are preventing companies from taking up fresh liquidity supply to increase production. As such, enterprises' financial expenses won't come down anytime soon. We think this will take at least six months. Moreover, the private sector won't see financing pressure ease until March.

Hang Seng Index to consolidate. We expect the Hang Seng Index (HSI) to test previous lows in 1Q12 and then rebound amid loosened liquidity, as fundamentals look for a bottom. We forecast HSI-listed companies will grow earnings by 9.0% in 2012. In 1Q12, we estimate a HSI PE of around 9.0x, or a level of between 16,500-20,000 points (PE range 8.25-10x; P/B range 1.03-1.28x). Among sectors, we recommend: (1) those benefiting from loosened policy controls and low valuations; (2) those with more certain earnings outlook; (3) those to benefit from favorable seasonality; and (4) defensive sectors.

Our 1Q12 top picks: China Overseas Land & Investment (COLI; 00688.HK), China BlueChemical (03983.HK), Shanghai Electric (02727.HK), China Power International (02380.HK), Daphne International (00210.HK) and Kingworld Medicines (01110.HK). (Read full report)