At first glance it is difficult to see any good news in yesterday's 5.4 per cent slide in the Hang Seng index or in the 6.6 per cent plunge in the H-share index. All the talk of a US recession following the revelation on Tuesday that Citigroup had chalked up losses of nearly US$10 billion in the last three months of last year helped create an apocalyptic mood in the market; a feeling heightened by the knowledge that yesterday's fall in the Hang Seng was the biggest since September 12, 2001. Yet for those canny investors who got out of Hong Kong stocks when the market gave clear signals it was rolling over back at the end of October, yesterday's drop in prices is positive. It helps set the market up for a vigorous rebound later in the year. Granted, a recovery looks like a distant prospect right now with markets around the world in freefall. But some of the conditions are already dropping into place. For one thing, the more stock prices fall the better value some begin to look. This does not necessarily apply to shares in companies like manufacturers and shipping lines that earn their profits by exporting or servicing international trade. They are likely to see their earnings expectations down-graded. But it will affect companies that make their money catering to local demand. After all, as the probability of a US recession mounts, so do the chances of deeper interest rate cuts from the Federal Reserve, and corresponding cuts in Hong Kong. With inflation ticking higher, key interest rates are likely to turn negative in inflation-adjusted terms. That will support consumer demand in Hong Kong, as well as boost the city's asset markets. Mastercard is forecasting retail sales growth of 10.5 per cent year on year in the first half of this year, while residential property prices have shot up roughly 15 per cent in the last couple of months. Falling international stock prices are also having another important effect. The recent sell-off in equities has widened the premium at which mainland-listed A shares trade compared with their H-share counterparts to record levels in excess of 100 per cent (see chart). In theory that should massively increase the attractiveness of Hong Kong-listed stocks to mainland investors. For the time being, however, they are hanging back, deterred in part by the recent acceleration in the yuan's appreciation. Their hesitation is illogical. Domestically-orientated H-share companies which generate their earnings on the mainland in yuan are naturally hedged against the currency's rise. As the yuan climbs, so should the Hong Kong dollar price of H shares. At some point, as the international panic recedes, mainland investors are going to wake up once again to the pricing differential between H shares and A shares, and resume pumping money into the Hong Kong market via the qualified domestic institutional investor scheme. That moment may be still be months away. But the further Hong Kong-listed stocks fall in the meantime, the more they will rebound when their time comes.