Blue chips help get the better of a bad bourse

HOW to make a silk bourse out of a sow's year? Not another column about Hong Kong shares, another portfolio? 'I don't ever want to see another share in my life,' cried the investor who bought HSBC in the Year of the Dog for $130 or Hanny Magnetics at $3 when it was the fund manager's dream share (it trades today in the 40s . . . cents that is).

All the local bulls have gone, after being barbecued in front of Exchange Square. The only thing left is the dogs howling in our portfolios. Local bears in full regalia are strutting their stuff, encouraging us to sell and then sell some more. Instead of being maximum bullish, investors today are maximum disgusted.

The all too familiar Litany of the Bear - rising interest rates, Deng Xiaoping's longevity, the 30-year bond, government land auctions populated by armless bidders, Chinese inflation and the bursting of the world liquidity bubble - has beaten investors into submission.

If the scene is so grim, why bother? Because, for the contrarian, that is the silver lining: things look so desperate now, it is not a bad time to buy. The Year of the Pig may well turn out to be a great buying year. Our view is that there is value to be found in this market, and our goal this year will be to do just that.

Starting with a cash holding of $2 million, we are going to manage a portfolio of local equities. Our aim is to outperform the Hang Seng Index over a one-year period.

Initially, our emphasis will be on blue chips or highly liquid and visible second-liners, as any rebound will begin here. Most second-and third-liners will be ignored for months, despite their fundamentals.

We start today by adding three shares to the portfolio. Given the poor sentiment towards banks and property, our first picks come from less depressed sectors of the market. In particular we favour the hongs, given their visible earnings growth and their reduced sensitivity to interest rate rises.