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 Name	Weighting %
HSBC Holdings	10.26%
Tencent Holdings	9.70%
AIA Group	8.86%
China Construction Bank	8.20%
China Mobile	5.41%
Ping An Insurance	4.81%
ICBC	4.67%
Bank of China	3.12%
Hong Kong Exchanges and Clearing	3.09%
CNOOC	2.59%
CK Hutchison Holdings	2.55%
CLP Holdings	1.92%
China Petroleum and Chemical	1.91%
Link REIT	1.82%
Hong Kong and China Gas	1.66%
Sun Hung Kai Properties	1.66%
CK Asset Holdings	1.64%
Hang Seng Bank	1.58%
China Life Insurance	1.41%
Galaxy Entertainment	1.36%
PetroChina	1.29%
BOC Hong Kong	1.28%
China Overseas Land and Investment	1.17%
Geely Auto	0.95%
Sands China	0.94%
China Resources Land	0.91%
Power Assets Holdings	0.86%
CITIC	0.83%
Country Garden	0.81%
Shenzhou Intl	0.81%
China Mengniu Dairy	0.75%
CSPC Pharma	0.75%
New World Development	0.74%
MTR Corporation	0.69%
China Shenhua Energy	0.68%
Wharf Real Estate Investment	0.68%
Sunny Optical	0.63%
China Unicom	0.62%
Bank of Communications	0.59%
Henderson Land Development	0.59%
WH Group	0.59%
Sino Biopharmaceutical Ltd.	0.58%
Hengan International	0.53%
Swire Pacific A	0.49%
AAC Technologies Holdings	0.47%
Cheung Kong Infrastructure Holdings	0.45%
Sino Land	0.44%
Want Want China	0.37%
Hang Lung Properties	0.35%
China Resources Power	0.33%

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.

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