THE world has really discovered Hong Kong, and, powered by overseas buying, the Hang Seng index has broken through the psychologically important 8,000 to cap a three-year, investment-portfolio-bursting bull run. ''Local and overseas investors who have cut from this market, especially in the last eight months, have been made to pay for it,'' said HG Asia economist Jake van Der Kamp. The punch through 8,000, recorded on October 7, signalled to local and international investors the stock market's coming of age. From a lowly regarded exchange run by Chinese broker barons and cartels, the stock market has been allowed to breakout of old strait-jackets of restraint and bloom into an open, relatively free place in which trading could be relied on to be efficient and relatively fair. Southern China's economic reform and growth, along with Hong Kong's flexibility in the face of change, has together formed a hot house of business opportunities and investment possibilities. Over the past three years, many brokers and investors alike have been caught wrong-footed at critical periods of domestic market development, taking the index into territory not forecast by the professionals in each given time frame. In 1990, the index rose by 7.5 per cent in a period of recovery from the flight of capital and collapse of the index during the Tiananmen Square uprising in June 1989. The gain made in 1990 came at a time when investors in Western markets were losing their shirts as the events in the Middle East, with the Iraq invasion of Kuwait, unfolded. Then, 1991 saw the Hang Seng index catapult to a 42 per cent gain as strong domestic corporate earnings' growth and economic growth in China fuelled stock price growth. From a low of around eight times price earnings ratio on an historic basis, the index climbed to around just under 10 in 1991. A period of relatively volatile trading followed in 1992 as the index rocketed to returns on the year of more than 40 per cent and then plunged in the negative sentiment and uncertainty of the Sino-British rows over plans for democracy in Hong Kong aheadof the handover of sovereignty to China in 1997. The index only managed a 28 per cent return, but any doubts about its ability to do great things in 1993 were to be thrown back in the faces of the doubters when the index resumed its growth path in the spring of that year. During the first half of 1993, market sentiment and index movement was dogged by Sino-British relations. Round after round of talks between the Chinese and the British over arrangements for elections in 1994 and 1995, along with the financing of infrastructure projects, caused rumour-ridden peaks and trough movements in the index. The listing of the first mainland incorporated company to enter the stock exchange in June - Tsingtao Brewery - proved to be a major landmark in the history of the exchange. This was followed by three more listings, but overall market sentiment and market trading trends were left little change by these epoch-making events. WHILE many domestic professional and individual investors kept to the sidelines in trading, overseas investors did not have the same concerns about local politics. This year ought to go down as the year of the American investor and the American investment bank. The penetration of overseas international institutional investment began during the 1980s with European and primarily United Kingdom institutions. Significant interest from overseas was kept at bay by the proliferation of exchanges. Until 1986, there were four. In that year, the current and unified exchange was created. Still, a reputation for cartelism, poor regulation and little minority investor protection led many investors to stay away. The 1987 Wall Street crash - when the stock market in Hong Kong closed for four days - almost completely ruined whatever reputation there was. Major foreign investment participation began to return in the wake of Tiananmen Square and, in 1991, when the market valuation looked attractive and the local regulatory environment was being cleaned up. A flood of new money hit the market in June 1991 with the Memorandum of Understanding between the British and Chinese over the building of the new airport at Chek Lap Kok. Most of this was European money as many international investors, a good number of whom were concentrated in a large clutch of expertise in London, recognised the economic changes going on in China and the impact this was to have on Hong Kong. The takeover of Midland Bank in the United kingdom by HSBC was also to prove a catalyst for growing foreign interest in Hong Kong stocks. Meanwhile, domestic liquidity was being fuelled by falling United States' interest rates. This sent bank deposits into negative territory, property yields on a deflationary path as new money hit the property market and caused a price spiral. THE first real indication of United States' interest in Hong Kong stocks came with the growth in US investor holdings in Hongkong Telecom. A global share issue of Hongkong Telecom in 1988 by merchant banks led by Prudential Asia, now DBS PruAsia, coupled with the development of the American Depository Receipt programme, making the company a New York-listed stock, ensured the territory's monopoly telecom supplier became its first global stock. US investors began taking up stakes in the group in a major way during the autumn of 1992 and the increasing penetration of US investment meant that, by 1993, the Hong Kong stock market had lost all but 24 per cent of the group's turnover at key periods of investor activity. Salomon issued warrants in Telecom and began marketing it along with the utility suppliers as high-quality long-term earnings related stocks that could be rated akin to corporate bonds offering competitive yields as well as satisfactory price appreciation. Consistent buying interest by the United States' investor came in the wake of the granting of the Most Favoured Nation Status for China and the Sino-US 301 trade talks in October 1992. In January, 1993, US buying was stepped up and, from daily broker reports, was consistent during the first half. US investment banks raised the profile of the territory's stocks in the US as their presence in Hong Kong grew. Merrill Lynch led the Shanghai Petrochemical issue with Peregrine Capital in July. Goldman Sachs built a presence, but appeared to achieve little else, while Morgan Stanley changed the face of overseas investment. In the autumn of 1993, the investment bank entered a concerted period of promotion of China and Hong Kong with a visit by US fund managers and rave reviews from global strategist Barton Biggs. His re-rating of the market, which many domestic competitors and US counterparts now frown on, from 0.2 per cent to three per cent of his portfolio weightings, triggered a major flood of cash into the market, sending the index on a catapult run upwards. This coincided with strong participation by the group in the futures index contracts trading. With reputedly more than 30 per cent and up to 45 per cent of all outstanding contracts in its pocket, the group was the best placed to benefit out of trading that saw the futures anticipate and lead the cash index in strong determined trading. On the back of this, the investment bank led a rejuvenation in the fortunes of the property development sector with the attraction of foreign, mainly Continental European, field interest-investor interest in Hong Kong stocks for the first time. In a series of high-profile convertible securities issues, the group brought the property sector out of the shadows. This coincided with a revaluation, which some might argue was unwarranted, of land banks, led by Henderson Land. This attempted to alter the valuation of undeveloped land bank from the traditional $800 a square foot book valuation to a more aggressive market rating akin to that of sale units in mass residential projects, placing the per square foot value at more than $2,000. The convertible issues in themselves were not the key development. It was the outside recognition that their recurrent income was of high quality ranking, their low gearing was internationally acclaimed, while their earnings growth prospects were not threatened which turned the heads of investors when re-assessing this sector.