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The threat of global meltdown is hanging ominously in the wake of the Yen crisis and the nervousness on Wall Street. Only now, it seems, is the extent of the Asian crisis understood by those outside the region.

Ironically, this may be just the time when the worst ef-fects of the crisis have already been felt, and the recovery phase is under way. Hong Kong is a market most experts consider to be fair value at this time, considering the hammering it has already suffered. The biggest concern in choosing a manager for Hong Kong exposure is whether that manager will still be around in its present form over the medium term. Peregrine has gone under, the much-vaunted Chinese-run investment house Impac has imploded and big name firms like Jardine Fleming and Indosuez have taken the opportunity to drastically cut back staff numbers.

But as ex-Impac director Joseph Ho, now MD at Rothschilds in Hong Kong says, this is the pain period: Things may deteriorate for another six months, but Hong Kong is a resilient economy and the market will bounce back."

As a measure of how fortunes have changed for Hong Kong securities houses, stock market turnover in the boom period around the time of the handover was eight times what it is now. At conservative estimates, retail sales are down 20%, tourism is down 25%, unemployment is 6% and rising, office rents are tumbling.

With all the gloom in global markets it is easy to forget the potential that still resides in the Asian region. For in-vestors looking at long term returns, that is the real story. Mark Konyn at Dresdner RCM in Hong Kong says, "The houses who come out of this crisis in good shape will be those who are seen to have given a valuable service in good markets and bad."

Even Hong Kong's best known contrarian, 'Dr Doom' himself, Marc Faber thinks the pessimism may have been overdone. But then he checks himself and suggests that "while accepting the fact that one should buy on bad news and when there is hardly any chance in sight for a quick rehabilitation for Hong Kong's sick economy, I lean towards staying out of Hong Kong equities for the time being. Better values seem to exist elsewhere in Asia where prices have declined much further and where the absolute price level of assets is about 70-80% lower than in Hong Kong."

Joseph Ho says: "One has to be very selective in Hong Kong. Pre-crash the main drivers were property, finance and infrastructure. Now it is case of stock selection and finding those companies, high tech companies for example, who are not exporting to Asia, so they are more exposed to the global trend. And there will always be stocks that actually benefit from a weaker economy. We have an Asian technology fund which was launched last July, so it wasn't good timing, but since the crisis, on a six month basis, the fund is the top performer in Asia. So it is possible to build a profitable portfolio in the current environment."

Oscar Wong, deputy managing director at Invesco GT comments: "There was a lot of complacency around the time the crisis blew up. People had become so used to making huge profits. Since 1982 we have not had a serious recession, to bring property prices down by 30-40%. So people had built up enormous wealth. People complain about the property slump but if you take values from even three years ago, they have gone up maybe 50%. At the moment as far as I can see property prices could come off another 5%."

Wong's advice for those who wish to take advantage of the opportunity is "If you're going to invest, do it for the long term. There's lot of potential and a need for capital and expertise."

It is possible that Hong Kong, like Japan, will never experience an asset bubble such as it has seen in the last five years, for many years to come. The emergence of new centres of prosperity such as Shanghai and Singapore will attract increasing amounts of foreign money. However, it is equally possible to see Hong Kong building on its strengths and remaining the hub of Asia. The key to its success of course is China.

The consensus view is that China will have to devalue the Renmimbi in order for the economy to continue its growth path. SocGen's Clive McDonnell disagrees with this, suggesting that "As China is not in competition with Asean in terms of goods it is exporting, we do not believe there has been a loss of competitiveness as a result of the stability of the RMB. Chinese exporters are actually the fastest growing in the region so far this year, with the exception of the Philippines. The weakness of the Yen will also impact export competitiveness in China this year." Richard Newell"

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