When Hong Kong's stock market reopens today after a badly needed day off, it is likely that both short and long-term investors will find powerful reasons to buy. Investors who prefer to look at the medium term, however, might be well advised to hold back and sit things out for a while. The arguments in favour of short-term buying are simple. With expectations growing that the US Congress will approve Treasury Secretary Henry Paulson's bailout package at the second attempt, equity markets around the world have rallied. On Tuesday, the benchmark US S&P 500 Index jumped 5.42 per cent. By yesterday lunch time, London's FTSE 100 had clawed back 6.8 per cent from Tuesday's low. Assuming no more political snarl-ups in Washington and no more surprise bank collapses overnight, the Hong Kong market will have some catching up to do today. Investors who don't mind taking sizeable risks in pursuit of a quick killing will buy local bank stocks. After the Hong Kong Monetary Authority announced a suite of liquidity support measures on Tuesday, the sector is likely to rebound especially vigorously. So much for the short-term case. The long-term rationale for buying is also fairly straightforward: Hong Kong-listed stocks look cheap. With the Hang Seng Index currently priced at about 12 times expected earnings for this year, Hong Kong-listed shares appear more attractively valued than at any time since the dotcom bust of 2000. With China's long-term growth prospects still robust, investors prepared to buy and hold can be reasonably confident of making decent returns over the next five years or so. But they will need nerves of steel. Volatility over the coming months will remain extremely high, and there is every chance that stocks that look cheap today could look a great deal cheaper before long. The first chart below - which shows Hang Seng Index valuations on a trailing price-earnings basis - shows stocks have fallen to much cheaper levels in past crises. Admittedly, the composition of the index has changed a great deal since the 1983 currency scare, and even since the Asian crisis of 1998, so comparisons are sketchy. Equally, trailing price-earnings ratios are of limited use as a valuation guide. But then ratios based on estimated earnings are suspect too. With consensus estimates indicating 2009 earnings per share growth for Hang Seng Index companies of 14 per cent, you have to wonder whether analysts have fully priced in the severity of the coming downturn. Should earnings forecasts get revised down further, Hong Kong stocks will look a lot less attractive at current prices. And they may well get revised down further. With China's exports to the US already deteriorating, and exports to Europe supported only by an overvalued euro, the outlook for Hong Kong's trade services sector is increasingly bleak. Prospects for Hong Kong's two core domestic sectors - banks and property - are also grim. With the global financial sector facing a long period of deleveraging and contraction, local banks will not be able to escape the consequences. Both lending and fee incomes look set to suffer. But if banks are bad, it is the property sector that is really scaring people at the moment. As some banks go bust and the rest shrink their balance sheets and their businesses, there will be less demand for grade A office space. Inevitably rents will fall. Financial contraction will also mean fewer bankers on smaller bonuses, which will hurt prices at the luxury end of the residential market. Mid-range prices will suffer too as the credit crunch squeezes mortgage rates higher and rising unemployment undermines affordability. Analysts at UOB Kay Hian warn average home prices in Hong Kong could fall by 35 per cent from their March peak, which would wipe out all the gains made in the last four years. That leaves the Hang Seng property index, currently on a price to estimated earnings ratio of about 11.5, looking relatively expensive. As the second chart below shows, it too has fallen to far lower valuations during past crises. So although today's market offers an attractive - if risky - trading opportunity, and while equity prospects still look good on a five-year horizon, investors looking at any interval in between might like to hang back and wait for even better value to emerge.