It was all going so well for mainland stocks in Hong Kong.

Just seven months ago, the Hang Seng China Enterprises Index was surging to the highest levels since 2008 and strategists couldn't raise their targets quick enough. Now, the gauge of so-called H shares is tumbling at the fastest pace among global peers, analysts are downgrading their forecasts, and valuations have dropped to levels approaching those of Zambia.

Societe Generale SA, which predicted in March that the Hang Seng China index would rally 17 percent by year-end, says the gauge will be flat in 2016. Selling by investors, meanwhile, has dragged down the H-share index by 37 percent from this year's high in May - the steepest drop among equity gauges in the world's 50 biggest markets.

It now trades at 6.9 times earnings, lower than every benchmark index apart from Zambia, the southern African country facing an economic crisis, and Laos, which only has four listed equities. The Hang Seng H share gauge is valued at the biggest discount versus the MSCI All-Country World Index since 2003, according to data compiled by Bloomberg.

Depressed valuations are luring bargain hunters from across the border. Mainland investors have been net buyers of Hong Kong stocks through the city's exchange link since Nov 27, while technical indicators suggest a rebound is overdue. The Hang Seng H share gauge's relative strength index was 28 on Monday - below the 30 level that some traders use as a signal to buy.

The H-share index rose 0.3 percent to 9,344.07 at the close of trading on Tuesday. "The only way that H shares can perform is if there's better momentum in the economy," said Francis Cheung, a senior strategist at CLSA Ltd. "The economy is not going to stabilize in 2016."

(HK Edition 12/16/2015 page8)