For international investors looking for quick profits, analysts here say avoid Hong Kong, at least for the next 18 months.
"There is a very high chance of a prolonged economic downturn," says Mark McFarland, Santander Investment's Asian economist. He likens Hong Kong to Japan, where an economic slump has held on for eight years.
"There's nothing else to say," he says. "It's all rather depressing."
Hong Kong now grapples with its first recession in 15 years. Property values have plummeted 40 to 50 percent since last autumn. Interest rates are high; banks are reluctant to lend; unemployment is over 4 percent, low by US standards but almost unheard of here.
Even worse, say free-market advocates, the administration of Chief Executive Tung Chee Hwa appears to have abandoned a long-standing policy of nonintervention in the markets. It recently announced a series of measures aimed at arresting the steep fall in real-estate prices after coming under pressure from property tycoons.
Property plays a crucial role in Hong Kong's economy, and most major companies have one hand in real estate.
International investors are waiting for real-estate prices to hit bottom before reentering the stock market, says Merrill Lynch analyst Richard Margolis.
But Mr. Margolis believes the bottom is still in the future. Despite sharp drops, residential and commercial prices remain some of the world's highest.
But market watchers and government officials are all quick to point out that Hong Kong is weathering the Asian financial storm better than its neighbors.
"This is not Armageddon," says Margolis. "Asset prices are taking a fearful caning, but the system itself is holding up extremely well.
"There are just no easy ways to make money in the stock market over the next 18 months," he says.
Most important, Hong Kong's major banks look financially sound. They don't have huge bad loans on their books as do their Japanese or East Asian counterparts. But with profits under pressure, banks are keeping more money in the safe. This credit squeeze is hurting businesses.
"No money, no recovery," says Kalina Ip, head of research at investment bank ABN-AMRO Hoare Govett.
Only when the financial institutions start to feel more comfortable about the economy will they start providing the liquidity needed for economic recovery, Ms. Ip says. She estimates this will happen some time in the first quarter of next year, if the rest of Asia settles down. And that worries her.
"For the first time, I feel it's out of our control," she says.
If Japan's economy deteriorates further, Japanese banks will be forced to sell their assets in Hong Kong, she explains, just as they did a few months ago. That withdrawal contributed to the current credit crunch.
But while the mood in Hong Kong is gloomy, Ip sees a bright side. Share prices sit at historic lows, when compared with corporate earnings, and she says that puts a limit to the stock market's downside.
So while investors should not expect quick profits, she says, this could be a good time for bargain shopping.