Last week's 500-plus-point pull-back in the Hang Seng Index provides a textbook opportunity to pick up Hong Kong shares on the cheap, according to ABN Amro strategists. In a report published in mid-October, the bank said the market was overdue for a correction after months of consistent gains, but advised investors to take advantage of any consolidation to load up on favourite blue chips. Shares were undervalued relative to the pace of economic expansion next year, the bank said, forecasting GDP growth of 7 per cent. 'We strongly believe Hong Kong is now at the start of a multi-year structural recovery,' says ABN Amro's chief Asian strategist Eddie Wong. 'After six bad years it will take some time for most people to believe the worst is really behind us. In fact, we doubt analysts have fully factored in a normal cyclical recovery, as analyst forecasts normally lag the market.' Mr Wong says one reason for the optimistic outlook is US dollar bearishness. While on the surface that might seem counter-intuitive, he explains that the weakening greenback will force an end to the deflationary pressures on the local economy, arresting the five-year price slide in domestic assets. As the Hong Kong dollar weakens in lock step with its US counterpart, domestic prices will begin to rise as an inflationary phase sets in. Under the dollar peg system, prices of domestic assets tend to move in the opposite direction to the external value of the currency. From the period beginning in January 1997 and ending last June, the Hong Kong dollar depreciated by 10.3 per cent in real effective exchange rate (REER) terms. Historically Hong Kong outperforms regional markets during periods of US dollar weakness, but it usually takes about year to catch fire, which means the recovery should be just about to kick in Mr Wong says. Despite accumulating huge surplus savings throughout the financial crisis, most investors kept these funds in US dollars, and effectively out of the local banking system. However as fears of a Hong Kong dollar devaluation ease, savers are likely to reverse those fund flows, bringing liquidity back to Hong Kong shores. 'The change in perception of the Hong Kong exchange rate will be hugely positive, notably for stock and property,' Mr Wong says. Looking at the big picture, Mr Wong believes Hong Kong's economy has done fairly well during the post-boom cycle. The real problem had been that the decline in property values more than offset savings on household balance sheets, severely damaging spending power. Mr Wong advises steering clear of property developers, as the sector has run too far ahead, and focus more on the banking sector, where valuations look more reasonable, as well as service industry heavyweights such as Cathay Pacific.