We outline the best- and worst-case scenarios for Hong Kong in the years to come. The best-case scenario is one in which Hong Kong successfully transforms itself into one of the most important cities in China, while at the same time being:

i) the country's main international financial centre, providing a comprehensive range of services,
ii) the retail hub for Mainland consumers,
iii) the commercial gateway to China,
iv) the springboard to overseas markets for China's corporate sector, and
v) an important force in some of the country's major sectors.

This scenario would see Hong Kong being elevated into one of the world's most important metropolises, and mean that the scale of many sectors in the city would be elevated to levels not previously envisaged. Hong Kong's fortune would then rise and fall along with China's economic strength, but in times when the country's economy is strong, some sectors in Hong Kong might rank as among the best-positioned in the World

The worst case: a prolonged derating
That said, such a transformation would not be easy or smooth. There are bottlenecks in terms of infrastructure and land resources, and the transformation could well give rise to many social and political issues.

The challenges Hong Kong faces do not stop there and could be much greater. It could be argued that every transformation in the city's history was essentially led by free market forces. Over the past few decades, it has experienced crises, times of despair, and periods almost of hopelessness, but eventually the city has managed to get through these, contrary to the expectations of many.

We have reason to believe that, apart from luck, laissez-faire market forces have played a positive role in the various transformations of the past, but there are reasons to doubt that the values required for the running of a laissez-faire free-market economy and society are being upheld by the current administration.

It appears to us that the free market is essentially complex and sophisticated system, the merits and strengths of which are not obvious and may not appeal to the media and bureaucracy.

It is therefore possible that Hong Kong may not achieve its potential. This might herald a prolonged period during which Hong Kong's position as an international city declines. However, at present, asset prices are at levels that we believe reflect expectations that the city will transform into a great metropolitan city. In some ways, if the process continues, it may resemble what happened to Venice, which went from being an influential city and commercial hub in the middles ages to mainly a tourist city nowadays.

Eoin Treacy's view Hong Kong's position as a gateway to China was in place long before it was reintegrated with the mainland in 1997. The knowhow built up through years of free market entrepreneurship leave the territory particularly well positioned to benefit from the evolution of China's economy over the coming decades. Hong Kong is also likely to represent a significant element in China's long-term ambitions for the Renminbi to become an internationally convertible currency.

The Hang Seng currently has a competitive P/E of 10.71 and yields 3.22%. It has been mostly rangebound since 2009 and has held a progression of higher major reaction low since 2011. The Index encountered resistance in the region of the upper side of the medium-term congestion area, near 24,000, from February and has pulled back to the 200-day MA near 22000. An strength in this area would confirm the return of demand dominance