Investment returns among Mandatory Provident Fund schemesÆ balanced funds fared well in 2007, with an industry median return of 21.1%, but members should expect annualised performance to moderate as low as single digits in 2008, says Mark Konyn, Asia-Pacific CEO at RCM in Hong Kong.

He explains this past yearÆs strong performance was aided by low local salary inflation and the stunning performance of China-affiliated stocks. ôThat will be harder to repeat in 2008,ö he says. Moreover the downside risks are stronger now than a year ago, notably in the United States, where property valuations have declined 20% nationally, while investors have turned pessimistic about EuropeÆs ability to produce strong economic growth and have largely given up on Japan.

Konyn also raises the discrepancy between optimism among many corporations versus the increasing volatility and gloom in the global macro economy. This helps explain the fairly positive performance in many stock markets despite the underlying problems in areas such as housing and credit. This dichotomy is not permanent, he suggests.

RCM continues to favour equities over bonds but with less conviction: the argument is based more on the lack of opportunity in fixed income, as US interest rates fall, yield curves steepen and credit spreads remain volatile. Within the equities space, emerging markets will do well û but RCM is sceptical these markets will repeat 2007Æs remarkable performance. ôEmerging markets, especially in Asia, will continue to do well on a selective basis,ö he says.

Traditionally when spreads on emerging-market bonds widen, it is a signal for outflows from their stock markets and currencies. Indeed, there has been such a movement out of some Asian markets and their currencies have weakened a bit in the past two months. But Konyn says in many cases, domestic consumption plays remain attractive. If anything, he believes that Western institutional investors, which have large cash reserves, may boost Asian and emerging markets if they see value.

ChinaÆs stock market has come off its record highs since October and is likely to ôconsolidateö, Konyn says, as opposed to crash. The silver lining remains Chinese companies, which continue to demonstrate very strong earnings growth: ôEarnings growth of 35% or more is possible for many companies,ö Konyn says. The expansion of ChinaÆs qualified foreign institutional investor program will also provide support.

RCM is particularly bullish on Hong Kong in 2008. The US Federal ReserveÆs rate cuts will have to be mimicked in Hong Kong, even as local inflation edges upward. The result: real negative interest rates, which will boost the local property market. This in turn will underpin Hong Kong stocks, and RCM reckons the Hang Seng Index can finish next year in the neighbourhood of 35,000.

For its MPF retirement portfolios, RCM is taking a more conservative stance, with fewer overweights in sectors it likes (including industrials, basic materials, energy, tech and US healthcare). It continues to avoid financial stocks such as banks. Its main geographic overweight is Hong Kong.