Bears roam but the long-term outlook for equities is safe

The steep falls in Hong Kong equity prices in recent weeks have been portrayed by some as an unmitigated disaster for all investors in local stocks.

Not necessarily so, says Paul Smith, managing director, Financial Institutions for Bermuda Trust (Far East), which, after HSBC, is the second largest administrator of pension funds in Hong Kong.

'Stock markets from inception are volatile beasts and go through periods of overvaluation, arguably such as the one we have been in over the last year or so, and then they correct. The market recoils and you enter a bear market. That's life, that's what happens, that's the process we are going through at the moment,' he said.

How long Hong Kong will be a bear market is, of course, difficult to predict, but Mr Smith points out the average bear market lasts 12 to 24 months.

'The likelihood is that we are going to go through a period of market difficulty, but I don't think it is right for long-term invested pension fund money to be out of equities. My view is the traditional one that equities are the class of assets to be in for pension funds. Their liabilities are long- term and the best-performing asset in the long term is equity.' Mr Smith does not believe the Government or investors should consider changing regulations under which the Mandatory Provident Fund is to be set up, because of the short-term vacillations of the stock market.

'This is a watershed period at the moment in Asia when stock market volatility is affecting the way business is done. That is going to take a while to work its way through before we come out the other end. No long-term damage has been done,' he said.