In the eternal battle between greed and fear, fear has had the upper hand over recent weeks.
It's not just that financial markets have been having one of their periodic attacks of the wobbles over Europe's sovereign debt. A surprise rise in the US unemployment rate has sparked worries that the American economy is heading for a soft patch. And to round things off, investors have woken up to the stresses in China's economy and concluded that the country may be heading for a hard landing.
In response, investors have bailed out of equities. In Hong Kong, the Hang Seng Index fell 8.5 per cent between the end of May and Tuesday's close, while the H-share index of locally listed mainland companies dropped 9.3 per cent.
But that was before yesterday's data release showing China's economy grew at a brisk 9.5 per cent rate in the second quarter, with industrial production climbing 15.1 per cent, a significant acceleration from the first quarter of the year.
With few signs of a hard landing to be seen, the market's fears have moderated, and greed has once again dared to raise its head. Although most investors remain wary, some have started to sit up and pay attention to the valuations on offer.
With analysts forecasting robust earnings growth of 15 per cent or more for this year, after their recent beating, Hong Kong-listed stocks are looking enticingly cheap. At yesterday's close, the Hang Seng Index was trading at a price to forecast earnings ratio of less than 12, while the H-share index was priced at just 10 times forecast earnings.
With the exception of the six-month crisis period following the collapse of Lehman Brothers in September 2008, both indices are now cheaper than at any other time in the last six-and-a-half years (see the charts).
Of course, there are two ways of looking at these ratios. One is that prices are cheap. The other is that the earnings forecasts for this year are too high. If that's the case, then the market is not as attractively valued as the price-earnings ratios imply.
No doubt there is an element of over-optimism about the earnings forecasts. Jonathan Garner, the chief Asian strategist at Morgan Stanley, reckons the current estimates are too high by between three and six percentage points.
That is not too surprising. Stock analysts are generally slow to revise their forecasts in response to changing economic conditions. They claim they spend too much time on the road talking to clients and not enough in front of their spreadsheets.
But even if earnings estimates are too high, Garner argues that stock valuations are still compelling. He has looked back over the past 18 years to examine previous episodes when stocks have been as cheap as they are now, and how they performed over the following months. On the vast majority of occasions, he says, investors who bought at these valuations would have made money, earning returns of anything between 8 and 31 per cent.
Garner believes the same pattern is going to repeat this time round, and reckons that anyone buying into the market now should be able to make a return of 15 per cent by the end of the year.
'The valuations are sufficiently attractive to compensate for the risks that are out there,' he says.
Garner isn't alone in his view. Strategists at HSBC and CLSA are also stressing the attractive valuations on offer and are making similar calls. Gary Evans at HSBC, for example, is forecasting a 16 per cent rise in the Hang Seng Index by the end of December.
For the time being, their bullish call is proving a tough message to sell. Garner admits that most of his institutional clients remain nervous, focusing on possible macroeconomic risks rather than stock valuations.
But that could soon change. Over the coming weeks, investors could conclude that the US soft patch is a normal temporary mid-cycle slowdown. Markets could realise that Italy is unlikely to face any trouble financing its debt from domestic savings, and that Ireland is fully funded for the next year and Portugal until mid-2013.
And following yesterday's data release, investors could decide that China isn't heading for a hard landing after all, and that the mainland housing market isn't as much of a bubble as they thought (more on that in the coming days).
In that case, the pendulum will rapidly swing away from fear and back towards greed. Investors will begin snapping up cheap stocks, and we could see the Hang Seng Index climbing back towards the 25,000 level by the end of the year.