IF there's a single word that best sums up his anticipation for next year's stock market, Edward Xiao said he would choose "bumpy."

The 30-year-old office worker in Shanghai, who has been investing in stocks for nearly five years, is looking at 2011 with some trepidation.

Although he managed to stay in the black with his investments in coal miners during a gyrating market in 2010, Xiao said he thinks that feat will be hard to repeat next year.

"There are no incentives so far to drive the market higher," he explained. "Just when everyone was feeling relieved that the worst of the global economic crisis had passed, worries about inflation, slower growth and rising interest rates in China are spoiling the party."

Xiao is not alone in fretting about prospects for the Chinese stock market next year as the key index ends the year with a whimper.

The Shanghai Composite Index has lost 16 percent this year, one of the world's worst performing markets. After rising as high as 3,306 points in January and falling to a low of 2,300 in mid-year, it has been fluctuating between 2,500 and 2,900 - bouncing up against but not breaking through the critical 3,000 level again.

Sleeping Beauty

What does all that mean? A choppy road ahead, say many analysts.

"The market will be a bit like Sleeping Beauty next year," said Deng Eryong, an analyst with Changjiang Securities Co. "It will have a hard time making any gains in the first quarter as inflation weighs in and corporate profits probably drop.

"The market will remain in a slump in the second quarter because inflation is likely to jump to a high level. But things are likely to turn around beginning in the third quarter, when profits for industrial companies start to pick up."

China's consumer prices in November surged 5.1 percent, the biggest gain in 28 months. A central bank poll of 20,000 people this month showed that most Chinese expected inflation to continue to accelerate.

Deng's outlook for 2011 is shared by forecasts from 24 brokerages. The consensus is for a market hobbled by inflationary concerns for the first half of next year, then, as prices subside, the market will wake up again.

Credit Suisse Group AG predicted in a report on December 25 that the rate of inflation could reach as high as 5 percent next year before it begins to abate. The Swiss-based financial services company is predicting a 20 percent rise for the mainland market by the end of next year.

Inflation, a top focus of the Chinese government's work plan for next year, may erode companies' earnings because of rising labor and raw material costs. That, in turn, would adversely affect stock prices and rates of return.

Equities could also be affected by the government's fire power aimed at inflation, including more interest-rate hikes and further clampdown on lending.

Both would make it much harder for companies to borrow money for expansion.

Added to that, an expected appreciation in the yuan next year could impair earnings of firms in the export sector, although airlines, real estate and banking sectors might profit as assets increase in value and more people can afford overseas flights.

Reap the benefits

Analysts said that if investors are patient and willing to weather the impact of inflation and a tighter monetary policy, they'll reap the benefits in the latter part of next year.

Still, picking the right stocks to position oneself is important. Among all the 24 forecasts released by brokerages, most showed preferences for companies that are either consumption-related or in sectors that are targeted for growth under China's new Five-Year Plan for the period between 2011 and 2015.

Equipment manufacturers such as Hubei Aviation Precision Machinery Technology Co and miners such as Henan Shenhuo Coal and Power Co and Yanzhou Coal Mining Co will be among the winners next year, according to Changjiang Securities.

In 2010, Aviation Precision, a Hubei-based firm engaged in the manufacture of seat adjustment mechanisms, was one of the star performers, surging more than 200 percent so far this year.

Also on Changjiang's list of recommended stocks for 2011 are: Yuan Longping High-Tech Agriculture Co, a leading firm in the agricultural sector; Wangfujing, one of the biggest retailers in China; Huadong Medicine Co; and CITIC Securities.

Rare-earth producers will continue their stunning performance next year because that group of industrial metals is critical to manufacturing everything from iPods to low-emission cars and wind turbines.

Guangdong Rising Nonferrous metal Co, a major producer of rare earths, was another standout on the market this year, with gains of more than 300 percent.

Worst performers

But on the negative side, analysts warned that steel makers such as Angang Steel Co and Hunan Valin Iron and Steel Group Co may extend their losses in 2011 because of declining world prices and overproduction.

Both steel makers were among the worst performers this year, with their stock prices down nearly 50 percent.

Real estate firms, such as Huafa Industrial Co, are also on brokers' lists of stocks to avoid, as the government continues its crackdown on a property bubble and speculators.

One big event awaiting investors in 2011 will be the opening of the long-anticipated international board, which will allow some overseas companies to do yuan-denominated initial public offerings on the Chinese mainland for the first time.

Geng Liang, Shanghai Stock Exchange chairman, said earlier this month that the bourse is generally ready for the launch of the board, though no timetable has been disclosed.

The board will offer an opportunity for Chinese investors to share in the growth of quality foreign companies, according to Yuan Yongmin, an Ernst & Young partner.

However, for individual investors like Xiao, government policies, not foreign IPOs, remain the focus.

Xiao said he will be watching for good investment opportunities in industries such as agriculture, new energy, pharmaceuticals and consumer goods.

"Small company shares, especially those unaffected by inflation, will be most ideal," he said.

However, the Shanghai native said he doesn't plan to pump additional funds into the market in the new year.

"I am cautious about the future, and the effects of all the anti-inflation policies look uncertain," he said. "A wait-and-watch approach is not a bad idea."