In my opinion, now that Hong Kong has definitively moved into recession its markets represent opportunities to make profits from the developing downturn.

Things could easily move to the level of 2003 bird flu (SARS) crisis, which would be about 50 percent lower than today.

The latest third-quarter GDP report provides definitive evidence of a sharply slowing economy. The Hong Kong economy shrank a seasonally adjusted 0.5 percent in the third quarter from the previous three months.

Only last week, the city’s chief executive acknowledged the risk of recession in 2009 had increased and that there would be a notable rise in unemployment. The shock to the global financial system in September and October was deeper and more abrupt than anticipated.

A prolonged drag on Hong Kong net exports seems inevitable when global demand is shrinking, especially when not only goods exports but also services exports are slowing. Services have been an important growth contributor over the past two years and have rarely managed to escape unscathed from previous economic crises.

The further bad news is that the Hong Kong economy can no longer rely on household spending and private investments to fuel growth, the major economic support pillars in the past years.

The spillover from the financial crisis into consumption has been evident.

The meltdown in the equity markets and declining job security have left business and consumer sentiment flagging.

Retail sales of automobiles, electronics, and valuable gifts dove as consumers clamped down on discretionary spending, and contractions are expected to follow when new rounds of layoffs take place.

Previous economic crises in Hong Kong were followed by steep rises in unemployment levels, and this crisis will be no exception. Gross fixed capital formation should register contractions in 2009 as companies scale back investment plans while others are forced to close.

We will likely see the unemployment rate reach 3.6 percent next month. It could reach more than 5 percent sometime in 2009.

With the quickly weakening global outlook — U.S. 2009 GDP expected in the negative zone and China at 7 percent or lower year-on-year GDP — it wouldn’t be a surprise to see a 1 percent or lower GDP for Hong Kong in 2009.

Notwithstanding government spending and capital spending expected to accelerate in 2009, Hong Kong will be unable to offset other negative factors that could outpace the negative SARS effects in 2003. In the meantime, Hong Kong’s purchasing managers' index already has been falling 4 months in a row, to 43.1 in October.

Last but not least, Hong Kong is very closely linked to the areas of China that are most affected by cost pressures, such as the exporters on the Chinese southeastern coast, and property values are falling all over the city.

In my opinion, the gloomy outlook for Hong Kong presents interesting opportunities for “short” investors. Now that Hong Kong also has moved into recession and considering the worst is still to come, the markets have no other way to go but down.

For instance, the XLHK Dow Jones Hong Kong EX closed Nov. 14 at 5,086. In my view, the XLHK index could easily move back to its value of April 20, 2003 of 2,580, during the 2003 SARS crisis, since now it is expected that the impact from the recession will be worse.

This 5,085 to 2,580 possible downward zone represents a move of about 50 percent.

I’m not saying that Hong Kong will move down to its SARS crisis levels, but I wouldn’t be surprised at all to see that happening, especially now that China’s Central Bank Vice Governor Yi Gang said on Nov. 14 that deflation is now a risk that China should take seriously.

People who might want to short a possible further downturn of the Hong Kong markets can do it through a variety of Hong Kong markets-related indexes on various exchanges or via an exchange-traded fund, like the iShares MSCI Hong Kong Index Fund (EWH).