Profit from going into the red

Investment: Hong Kong's stocks are riding high at the moment.

Investing in a Hong Kong unit trust might seem about the riskiest thing you could do with your money right now. These funds are classified as high risk at the best of times, and coming under the wing of a Communist state hardly seems likely to enhance anywhere's profit prospects.

People in Britain or the US may worry, but the closer you get to Hong Kong, the less worried investors are. China has succeeded in convincing the local business community that far from threatening economic growth in the colony, the new administration set to rule the colony from the end of June is likely to give Hong Kong an added boost.

"A while ago maybe fund managers were nervous, particularly overseas fund managers, because they read the press reports which are negative. But those who live here are not worried," says Haddon Zia, fund manager at Prudential Portfolio Managers Worldwide, in Hong Kong.

China may be run by Communists, but its economic strategy is another story. "Anyone who's been to China knows they're more capitalist than any Western country," Mr Zia says. Concerns have been voiced about human rights in a China-run Hong Kong, but investors appear unfazed about their bottom line.

Economic development is one of the Chinese government's main priorities, so it is not seen as likely to do anything to harm the prosperity or competitiveness of Hong Kong.

And there is another reason why China will keep its word over Hong Kong, maintaining the current system in what will be the Special Administrative Region. China ultimately wants reunification with Taiwan, and how it handles the handover of Hong Kong could affect the chances of this coming about.

Prices on the Hang Seng, Hong Kong's stock exchange and home to banking group HSBC Holdings and conglomerate Hutchison Whampoa, are at record highs, having taken a breathless roller-coaster ride ever since the early 1980s when handover negotiations began. The prospect of the looming handover has prompted alternate waves of investor fear and euphoria.

Although Hong Kong Island and mainland Kowloon belong to the UK, the New Territories, which comprise more than 97 per cent of the land of Hong Kong, were leased from China in 1898 for 99 years. As Hong Kong Island and Kowloon were seen as too small to be economically viable on their own, it was eventually agreed that the entire colony would be handed over when the lease expired.

In the high-rise colony, where the pace of Manhattan meets the sounds and smells of Shanghai, property prices have hurtled from one extreme to the other. Having plummeted in the early 1980s, they raced away in the 1990s, apart from suffering a sharp fall in 1995.

"There are still a lot of opportunities in Hong Kong, but it remains a risky environment in the sense that the index is higher now," Sean Kelly, fund manager at Gartmore, says. "Hong Kong is in a period of incredible dynamic change of which the handover is only part, and this will inevitably lead to volatility."

Gartmore runs its own Hong Kong unit trust. Performance over the last five years has been strong, with a pounds 1,000 investment having grown to pounds 2,577.73 in that time, according to financial information provider MoneyFacts. Ten-year performance has been spectacular compared with other parts of the world, with pounds 1,000 growing to pounds 5,353.61.

But HSBC's Hong Kong Growth fund heads the league tables of Far East unit trusts. In the last year alone, a pounds 1,000 investment would have grown to pounds 1,241.48.

What does the future hold? Stocks have been propelled by a number of factors, including speculation in various individual shares. One of the latest rumours to hit the market was that the Chinese government might take a significant stake in HongKong Telecom.

Interest in so-called "red chips" - Chinese state-owned companies being partially floated on the Hong Kong exchange - reached fever pitch last week as the subscription offer for shares in Beijing Enterprises was 1,000 times oversubscribed. Other red chips have risen more than 40 per cent this year. The belief that the Chinese government may inject extra assets later on gives red chips added allure.

But Kam Ming Wong, head of research at SBC Warburg, in Hong Kong, says the outlook for stocks this year is neutral. He forecasts the Hang Seng will end 1997 at around 14,000, from around 14,600 now, with more interest- rate rises in the second half putting a damper on growth prospects.

"The existing government as well as the new government is trying very hard to be cautious ... they are aiming for a smooth handover," he says.

Mr Zia sees the best prospects reserved for companies with real business in China. Clothing retailer Glorious Sun has 80 per cent of its sales in China. "These companies are well placed to take advantage of the 9 to 10 per cent economic growth in China," he says.

Though the prospect of China taking over may prompt jitters on some counts, fund managers say investors are keeping their money in the colony. Mr Zia says: "As long as Hong Kong is the port of entry to China, it is going to benefit."