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Although the lingering effects of the global economic recession left Hong Kong distressed since the second half of 2011, it was on a slower recovery trail in 2012. Now, the country seems poised for strong growth yet again in 2013, mainly thanks to its integration with China and some impending Chinese reforms following the leadership changes at the end of the first quarter of 2013.

Hong Kong ended 2012 on an upbeat note with Hang Seng delivering an impressive gain of around 20.0%. Now, the Hang Seng is currently hovering around its 52-week high 23,477.90.

The tendency to attract more FDI, minimal government intervention, practices of low taxation and an overall business-friendly regulatory environment strongly reinforce the country’s entrepreneurial dynamism, while macroeconomic stability involves less risk. Hong Kong boasts a rapidly expanding service sector which accounts for more than 90% of GDP as well as the status of highest per capita holding of foreign exchange reserves.

At present, the Hong Kong economy enjoys maximum freedom with a score of 89.3 on a scale of 100. Though down 0.6 points year-over-year due to higher government spending and inflation, the region has maintained this top position for 19 consecutive years.

Domestic demand is also quite strong in Hong Kong thanks to the country’s stable job profile. All these factors place the destination as a safeguard to play with emerging markets in Southeast Asia and the Pacific Rim (See: Hong Kong ETF Investing 101).

While Hong Kong, a special administrative region of the People's Republic of China, acted as a safe haven amid fears of ‘hard landing’ in Mainland China last year, the gradual optimism surrounding China should also bode well for Hong Kong Funds (see: Try Small Cap ETFs to Gain from Chinese Domestic Demand).

Moreover, the markets are enthusiastic about the urbanization theme in China that is reportedly benefiting some allied Hong Kong listed stocks. With domestic consumption is on the rise, sectors like infrastructure, construction and property are slated to buoy in early 2013.

Another driving factor will be quantitative easing in the U.S. as well as the monetary stimulus package in Europe and Japan. These funds from rest of the world are likely to look for a relatively safe zone ─ Hong Kong stocks.

How to Play

There are three ETF choices to tap this economy namely iShares MSCI Hong Kong Index (EWH - ETF report), Hong Kong AlphaDEX Fund (FHK - ETF report) and iShares MSCI Hong Kong Small Cap Index (EWHS - ETF report) (see: Try Small Cap ETFs to Gain from Chinese Domestic Demand).

However, the most popular among these is the EWH which seeks to provide investment results of publicly traded securities in the Hong Kong market, as measured by the MSCI Hong Kong Index.

The fund manages an asset base of $3.1 billion and trades at a volume level of more than 12 million shares a day (See: Top Ranked Hong Kong ETF in Focus).

In terms of sector holdings, the fund is heavily invested in the financial sector with 62.3% in financial companies. Investors should note that, Hong Kong is, currently, one of the most competitive financial and business centers, not only in Asia but in the entire world.

The fund charges investors just 52 basis points on an annual basis. The handsome return of 23.7% over the past one year also makes it an extremely strong performer. Investors should also note that the fund has touched a low of $15.48 and a high of $20.15 over a 52-week period, and that it is currently hovering near the 52-week high level.

EWH pays out a decent dividend yield of 2.52%. However, investors having higher appetite for dividend can consider EWHS which offers a robust yield with an expense ratio of 59 basis points. Further, EWHS, being a pure play in the small cap equity segment, EWHS should be more responsive to the uptrend in markets.

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