This will be a particularly complex year for Asian equity markets and any strategist who tells you he has a clear view of how this will play out is deluding himself, says Garry Evans, chief equity strategist for Asia-Pacific at HSBC.

The competing forces of ultra-low interest rates and huge fiscal packages versus global deleveraging is expected to produce wild swings in stock markets in 2009, the Hong Kong-based Evans says in a Pan-Asia equity strategy report.

HSBC expects macro data to improve sharply and a series of good news could lead investors to conclude that the recession is ending. However, shocks such as the failure of a bank, a country default or the realisation that global imbalances will take longer to unwind will deflate the optimism and markets will take a tumble, HSBC says.

Stock markets in Asia remain volatile, but will likely end the year either up or down by 10%, according to HSBC. After all, itÆs very rare for the stock market to enter into a new bull market straight away after hitting a bottom.

ôThe most likely scenario for 2009 is for sharp ups and downs, with the index ending the year close to its current level,ö says Evans. ôIn this environment, investors need to think about balancing risk and reward,ö Evans says in the report.

On the bright side, at least the global economy wonÆt be on a continuous downward spiral and stock markets wonÆt perform as badly as they did last year, when many indexes fell by more than 50%.

ôInvestors should take a little cyclical exposure while sticking to quality. That should give decent upside during the upswings, but avoid excessive downside risk during the corrections,ö Evans says.

The best way to do this is through a portfolio of blue-chip household-name stocks û what HSBC calls æAsiaÆs Super TenÆ û and some exposure to deeply oversold, but still decent quality, stocks.

HSBCÆs super 10 stocks for 2009 û those it considers to be top-quality stocks û are Catahy Pacific and Li & Fund in Hong Kong; China Steel and Taiwan Semiconductor in Taiwan; ICBC, Shanghai Electric Group, Sinopec and ZTE Corporation in China; and Infosys Technologies and Reliance Industries in India.

With economic conditions likely to be volatile, sector bets will be less important than stock choices this year, Evans says.

As Evan notes, the simple way to outperform last year was to overweight defensive sectors. Utilities, telecoms, consumer staples and healthcare were the only sectors that significantly outperformed MSCI Asia ex-Japan in 2008. The best performing large-cap stocks in the MSCI index (and among only 10 stocks in Asia that ended the year in positive territory) were classic defensives such as Hindustan Lever (+22%), Unilever Indonesia (+18%), LG Telecom (+7%) and British American Tobacco Malaysia (+7%).

ôWe doubt that a similar strategy will work in 2009,ö says Evans.

HSBC has reduced its exposure to defensives, lowering telecoms, utilities and healthcare to neutral. It is overweight in industrials and energy.

Markets-wise, HSBC has raised Taiwan to neutral, India to overweight, and Indonesia to neutral. It has cut Malaysia to underweight. It has maintained its weightings in China and Singapore at overweight; Korea, Thailand, Philippines, New Zealand, Pakistan at underweight; and Japan and Hong Kong at neutral.

HSBCÆs decision to raise Taiwan from underweight to neutral is against consensus as most fund managers and analysts are bearish over this market. The decision may indeed appear ôstrangeö, Evans says as Taiwan is deeply cyclical, with the IT sector representing 53% of market cap. Plus, HSBCÆs economists expect TaiwanÆs GDP to contract by 0.7% this year.

ôOur view, however, is that we want to take a little cyclical exposure over the next few quarters and that Taiwan is probably the best market in which to do this,ö Evans says. ôImprovement in relations with Beijing ûwhich should lead next to mainland money entering TaiwanÆs stock and real estate markets û could produce some upward surprises in 2009.ö

While this year is likely to be dire for earnings of Taiwanese companies, this is already well understood since analysts forecast EPS to fall 38% in 2009 after a 42% decline in 2008, Evans says. Structural worries are not so serious, he adds, with banks fairly well capitalised apart from their insurance subsidiaries. Plus, Taiwan has foreign exchange reserves of around $281 billion.