Hong Kong stock prices will probably begin their recovery this year, despite the threat of war in Iraq and universal gloom over the outlook for the domestic economy, according to Oscar Leung Kin-fai, senior investment manager with ING Investment Management Asia-Pacific. 'We believe the Hong Kong market is offering an entry point for the long-term investor. The main reason is the relationship between the bond yield and the dividend yield. Now, a 10-year certificate of deposit [CD] is only offering about 4.8 or 5 per cent. A typical blue-chip stock can give you 4 or 5 per cent in dividend yield. So the gap has narrowed to less than 100 basis points. 'Compare this to the figure for 1997 or 2000. At that time, 10-year CDs were offering about 7 per cent and the dividend yield was only about 2 per cent. The gap was 500 basis points. To us, this is a sign that equity prices are already down to a very reasonable level,' Mr Leung said. One simple explanation for a wide gap between fixed income and stock dividend yields during a bull market is investors demand less of a known reward to hold stocks when they believe there will be capital appreciation. Conversely, dividend yields that look attractive in a bull market do not look so good in a bear market if stock prices are expected to fall in future. In today's volatile stock market, a year's dividend can easily be devoured in one day of falling stock prices. 'In 2000, the equity market was high but people were still bullish about equities because they expected the economy to continue to grow and stocks to appreciate. Now, when we look back, it seems they were mistaken and fixed income would have been a better investment. Now the equity market is not good. There is a lot of uncertainty, but with the Hang Seng Index at about 9,200 points this is a good entry point. There is a high probability the market will be higher than the current level by the end of the year.' Mr Leung is jointly responsible for investing about US$800 million in funds sourced in Hong Kong. The money is from a variety of non-retail sources: insurance money from sister company ING Life, pension money from corporate Occupational Retirement Scheme Ordinance (Orso) plans and funds belonging to members of the Mandatory Provident Fund (MPF). Most of this big pool of money - about 90 per cent, Mr Leung said - was invested in bonds and cash. Only about US$60 million was invested in stock markets, but this was nothing unusual, as Mr Leung explained: 'The investment mandates in life insurance and Orso funds are very cautious. These funds need to be largely invested in fixed income. And the amounts invested in fixed income are larger than in stock investments. We are long-term investors. We buy and hold in the fixed income and stock markets. Our investment philosophy is medium to long-term. Our investment horizon is about three to five years. We believe share prices are driven by earnings, which are derived from economic growth.' Mr Leung said ING adopted a 'price for growth' strategy in picking stocks. 'We are not 100 per cent value investor or 100 per cent growth. We have a model we use to determine relative value. It looks for a reasonable price for reasonable growth.' ING sets its overall market outlook and asset allocation at meetings of its investment committee. 'We had a major meeting at the end of last year to paint a picture for 2003. We discussed what weighting to give to fixed income and bonds, among other issues. As new funds come in, we allocate them according to this plan. We also hold bimonthly meetings to adjust this plan, if necessary.' Mr Leung expected a volatile first half for Hong Kong equities this year, with the threat of war in Iraq and volatility in the United States market. However, he said it was becoming clear that while the performance of the US economy and stock markets was an important influence on Hong Kong, the special administrative region had other factors in its favour, notably the strength of the mainland economy. 'Hong Kong will continue to benefit from the economic growth in China. For example, export growth was good in the last quarter for the mainland and Hong Kong because a lot of mainland exports go through Hong Kong. It is largely due to fixed asset investment in China with factories being built for export. We expect this growth to continue in the current quarter.' Mainland tourism to Hong Kong was another positive factor that would boost local consumption, he said. 'Domestic consumption is a little sluggish. I think people are concerned about their jobs and property prices. They are keeping money in their pockets instead of spending. Bank deposits are up to HK$3.3 trillion. Compare that to 1997 when it was HK$2.6 trillion.' Mr Leung said the property sector would benefit from a clearer signal of government intentions on supply, which had become evident since last year. 'I don't think people will become bullish about property in the short term, but they will become more confident that values will not continue to fall. We are at, or near, the turning point for residential property.' Among Hong Kong stocks, Mr Leung said he was positive on China-related companies, especially those exposed to infrastructure. Some telecommunications stocks were starting to offer good value and there were positive signs for retail with the growth in mainland tourism. Big banks would ride the expected recovery in the second half of the year and mid-sized banks with mainland exposure would grow with the mainland economy. Smaller banks would find it difficult to compete with their bigger cousins in profitable fee-based sectors such as wealth management products, he said. Another group of stocks he favoured were conglomerates with transport businesses, which would gain from rising trade. ING is showing negative returns on its MPF funds. Its Master Trust in the Lifestyle 20-40 per cent equities sector returned minus 1.83 per cent in the year to January 24, Hong Kong Investment Funds Association figures showed. In the 40-60 per cent equities sector, another ING Stable Growth Master Trust returned minus 2.07 per cent for the year, compared with the average of the 31 funds of minus 2.84 per cent. In the higher equities (60-80 per cent) sector, two ING Balanced MPF Funds returned minus 10.07 per cent and minus 10.29 per cent compared with the sector average of minus 8.21 per cent. In the MPF Hong Kong equities sector, two ING funds returned 15.44 per cent and minus 15.69 per cent compared with the sector average of minus 12.58 per cent for 22 funds. PROFILE Oscar Leung Kin-fai 1987:Graduated from City Univer sity of Hong Kong (formerly City Polytechnic of HK). 1988:Senior investment officer for the Guangdong Finance Company. 1990:Senior portfolio manager for Nomura Asset Management Hong Kong. 1998:Senior investment manager for ING Life Insurance. 2001:Senior investment manager for ING Investment Management.