Is The Hong Kong Market The Best Market for 2019?

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The Hong Kong stock market has not been a kind place for investors in 2018. The Hang Seng Index hit a peak at the end of January this year and has seen a sharp decline ever since.

From its peak to the end of October this year, the index fell close to 26%.

At the end of 5th Dec 2018, the Hang Seng Index is still trading at about a negative 12% year to date return.

The Hong Kong market would most likely be in the negative territory for 2018, but could this highlight a potential rebound for the index in 2019? Let’s investigate:

Past History

According to Statista, the Hang Seng Index has experienced only 3 years with negative returns over the past 15 years (2002 – 2017). And in every instance, the Hang Seng Index was able to rebound the following year. Although past performance is not a reflection of future performance, it does highlight the resilience of the Hang Seng Index.

On top of that, the continuous expansion of the Chinese economy over the period would have enabled companies within the index to grow.

What Is Hang Seng Index?

The Hang Seng Index is made up of the performance of 50 of the largest companies listed on the Hong Kong Stock Exchange. However, the weightage between them varies depending on their market capitalisation and free-float.

The current list of 50 companies within the Index includes:

 

Stock NameWeighting %
HSBC Holdings10.26%
Tencent Holdings9.70%
AIA Group8.86%
China Construction Bank8.20%
China Mobile5.41%
Ping An Insurance4.81%
ICBC4.67%
Bank of China3.12%
Hong Kong Exchanges and Clearing3.09%
CNOOC2.59%
CK Hutchison Holdings2.55%
CLP Holdings1.92%
China Petroleum and Chemical1.91%
Link REIT1.82%
Hong Kong and China Gas1.66%
Sun Hung Kai Properties1.66%
CK Asset Holdings1.64%
Hang Seng Bank1.58%
China Life Insurance1.41%
Galaxy Entertainment1.36%
PetroChina1.29%
BOC Hong Kong1.28%
China Overseas Land and Investment1.17%
Geely Auto0.95%
Sands China0.94%
China Resources Land0.91%
Power Assets Holdings0.86%
CITIC0.83%
Country Garden0.81%
Shenzhou Intl0.81%
China Mengniu Dairy0.75%
CSPC Pharma0.75%
New World Development0.74%
MTR Corporation0.69%
China Shenhua Energy0.68%
Wharf Real Estate Investment0.68%
Sunny Optical0.63%
China Unicom0.62%
Bank of Communications0.59%
Henderson Land Development0.59%
WH Group0.59%
Sino Biopharmaceutical Ltd.0.58%
Hengan International0.53%
Swire Pacific A0.49%
AAC Technologies Holdings0.47%
Cheung Kong Infrastructure Holdings0.45%
Sino Land0.44%
Want Want China0.37%
Hang Lung Properties0.35%
China Resources Power0.33%

Source: Hang Seng Index ETF (2833. HK)

Who Dragged Down The Index?

If you looked at the composition of the index, you would realise that most of the companies within the Hang Seng Index are exposed to the economy of mainland China. Moreover, the top 10 companies in the index now contribute more than 60% of the weightage. We can also see that this top list is dominated by companies in a few industries, namely;

  • Financial (43% of Index)
    • International Bank, HSBC Holdings
    • Insurers, AIA Group & Ping An Insurance
    • The three Chinese Banks
    • Hong Kong Exchange & Clearing Ltd
  • Technology (9.7% of Index)
    • Tencent Holdings
  • Telecommunication (5.4% of Index)
    • China Mobile
  • Oil and Gas (2.6% of Index)
    • CNOOC

The Perfect Storm For Hang Seng Index?

2018 seems to be the perfect storm for the index. Almost anything that could go wrong went wrong for its main constitutes.

For example, HSBC Holdings (HKEX:5) continues to have a rough year, with lawsuits and fines coming one after another, mostly with regards to the lack of money laundering controls, data breach and other compliances issues.

Furthermore, the Chinese financial sector is undergoing a period of deleveraging as the government has acknowledged that the debt level in China has reached a worrying level. That has risen the risk of default in the financial system and put pressure on the profitability of the major banks.

And we have to add in a trade war with the US during the same period.

Lastly, its technology giant, Tencent Holdings (HKEX:700), faced its newest crisis with more restrictions on its gaming release and a possible restructuring with the entire industry. The company has seen more than a 30% drop in its share price this year from its peak in February.

Is The Value In Hong Kong?

Due to the selldown in the Hang Seng Index, many of its financial banks are trading at record-level dividend yields. The four major banks; Bank of China (HKEX.3988), Industrial and Commercial Bank (HKEX.1398), China Construction Bank (HKEX.939) and Agricultural Bank of China (HKEX.1288), are currently trading with a dividend yield of 5% to 6%.

As for the current valuation of Tencent Holdings, this is what the research team at FSMOne has to say:

“Tencent currently trades at a forward PE ratio 24.4X (based on 2019 estimated earnings), which is below peers’ average of 28X. It is also trading at the lowest PE ratio in the past 5 years.”

Of course, there will still be risks in the market. For one, the unresolved trade war between China and the US is one that could drag on for years and have a major impact on the global economy. When investing in the Hong Kong stock market, we will also be exposed to the Hong Kong dollar and Chinese Renminbi currency risks as well.

Yet it is exactly when there is a crisis, there will be opportunities.

More Research On The Hong Kong Market

It is not just us at Value Invest Asia who is optimistic about the Hong Kong market. The research team from FSMOne.com, an integrated wealth management investment platform which is the Business-to-Consumer (B2C) division of iFAST Corporation Limited (SGX:AIY), has also published research on why there is a golden opportunity available in the Hong Kong Market.

You can easily access the full reports and invest in the Hong Kong market through a FSMOne account. FSMOne now offers one of the lowest brokerage charges in Singapore for you to invest internationally.

Source: FSMOne.com Pricing Website (https://secure.fundsupermart.com/fsm/new-to-fsm/pricing-structure)

You can also find a full suite of thematic portfolios available for investors who are keen to invest into specific themes such as, Income Focus or Value Focus. Besides that, you can also invest in companies listed on Hong Kong Stock Exchange (HKEX) or the US (NASDAQ, NYSE, NYSE American, NYSE Arca) at 0.08%, subject to the minimum investment amount of HK$50 and US$8.80 respectively.

You can view all your investment holdings in one place and be able to invest in Unit Trusts, Bonds (Wholesale/Retail) and FSM Managed Portfolios (FSM MAPS) directly from your FSMOne account as well.

You can click here to open an account for free with FSMOne now and start diversifying your investment.

info@valueinvestasia.com

A Digital Financial Media Company: Bringing you honest analysis and reporting on the Asian stock markets.

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