Hong Kong conglomerates are unlikely to see a fundamental recovery in earnings before the end of the year, Salomon Smith Barney says. They were suffering from slowing consumption, deflation, a collapse in trade, a new telecoms regime and balance-sheet blues, Salomon's head of research for Hong Kong, Anil Daswani, said. The coming reporting season might yield surprises, he said, especially in regard to balance sheets. For conglomerates, the year would not be one to remember. Salomon's report covers Citic Pacific, Guoco, Hutchison Whampoa, First Pacific, Jardine Group, Shun Tak and Swire Pacific. Finding growth had become increasingly difficult because gains made at stronger businesses were being offset by declines elsewhere, Mr Daswani said. Salomon's said its biggest concern for the conglomerates was an inevitable balance-sheet meltdown, which was most likely to be seen when annual results were announced next month. 'Almost every conglomerate has significant exposure to investment property, and [Salomon] continues to believe that the magnitude of these revaluations has not been fully reflected, given current valuations,' Mr Daswani said. Book values and gearings were both expected to suffer. He said he maintained a defensive stance and favoured valued stocks such as Citic Pacific and Guoco - and Hutchison Whampoa, where geographical diversity was likely to be the saving grace. Citic Pacific remains Salomon's top pick for the conglomerate sector this year.