In recent years, dividend assets have been hot, and with the continuous correction of A-share dividend assets, Hong Kong stock dividends are on the rise, attracting more and more investors' attention. Under the current market consolidation, what are the coping strategies for dividend asset allocation? What are the advantages of Hong Kong stock dividends compared with A-share dividends? What are the logical threads behind it? Focusing on the hot issues that the majority of investors are concerned about, we invited Yu Zhanchang, fund manager of the quantitative and derivatives investment department of Penghua Fund, to give guidance and answer questions, let's listen to his views~
Yu Zhanchang
Penghua Quantitative and Derivatives Investment Department
Fund Manager
Q: Standing in the middle of the year, what are your allocation strategy suggestions in the current macro environment?
Yu Zhanchang: In the medium and long term, in the context of the decline in domestic deposit rates and the lack of high-yield urban investment bonds, institutional funds will face a more serious asset shortage after entering the era of low interest rates. Referring to the experience of Japan's low interest rate era, it is highly likely that institutional funds will choose to go overseas and carry out global asset allocation, and Hong Kong stocks are expected to become a bridgehead for mainland institutional funds to go overseas. For absolute return attribute funds, the current advantages of the high dividend dividend sector of Hong Kong stocks are still obvious: (1) For a long time, Hong Kong stocks have had a significant discount compared with A-shares, as of 2024/6/4, the Hang Seng AH share premium index is 138.8, and Hong Kong stocks have obvious cost performance; (2) Hong Kong stocks have obvious advantages in high dividends, which are 5.6% higher than the A-share dividend index and higher than most markets in the world.
After experiencing valuation repair, wait for the fundamentals to pick up and further interest rate cuts. Since the beginning of April, the VIX fear index has risen sharply due to the intensification of geopolitical risks due to the escalation of the situation in the Middle East, coupled with the fact that US inflation continues to exceed expectations, which has led to a shift back in market expectations for the Fed's interest rate cut. At the same time, foreign investors have continued to raise China's economic growth expectations since April, and the overall valuation of Hong Kong stocks is at a low level, driven by internal and external factors, Hong Kong stocks have ushered in a continuous upward trend Since mid-to-late May, the overall valuation of Hong Kong stocks has been restored to a reasonable position, while the volatility of overseas markets has dropped significantly, and Hong Kong stocks have ushered in a pullback. Looking ahead, the fundamentals still need to continue to wait for the recovery signal, and the expectation of interest rate cuts will bring long-term allocation value to Hong Kong stocks. Since the second quarter, the domestic economic data has not shown the quarter-on-quarter improvement expected by investors, and since the 517 real estate new policy, the transaction volume of the real estate policy in first-tier cities has not increased significantly, reflecting that the efficacy of the new real estate policy still needs to be verified; Overall, we still need to wait patiently for fundamentals to improve. On the other hand, although there is still uncertainty about the timing of the Fed's interest rate cut during the year, the liquidity environment of Hong Kong stocks is expected to gradually improve in the future under the expectation of the interest rate cut cycle, and Hong Kong stock dividend assets have long-term allocation value.
Q: In the dividend sector, what is the difference between Hong Kong stock dividends and A-share dividends?
Yu Zhanchang: In recent years, dividend assets have been hot, and with the continuous correction of A-share dividend assets, Hong Kong stock dividends are rising. Due to the rise of A-share dividends, while the dividend assets of Hong Kong stocks are still in a low depression, especially in the central enterprises listed on the Hong Kong stock market, the dividend expectation is stable, the discount is more, and the dividend yield is high, which has attracted a large number of investors.
There are many types of central and state-owned enterprise indexes that invest in A-shares, mainly the index of the CSI brand, and there are fewer central and state-owned enterprise indexes that invest in Hong Kong stocks. The pure Hong Kong stock is the CSI Hong Kong Mainland State-owned Enterprises Index, which focuses on mainland enterprises but is listed on the Hong Kong stock market, including state-owned enterprises and central enterprises, and the financial proportion is very high, adding up to more than 50%. The difference between the CSI Guoxin Hong Kong Stock Connect Central Enterprise Dividend Index and ours is that it excludes finance. The Hang Seng China State-owned Enterprises Index is not a state-owned enterprise index, but a state-owned enterprise index, Hang Seng's brand influence in the Hong Kong stock market is still relatively large, and many of the bigger ones are actually the Hong Kong Stock Connect Index under the non-CSI system, which is the QDII index under the Hang Seng system, so we launched the Hang Seng China Central Enterprises Index.
When we invest in dividend assets, the first factor we need to consider is the overall dividend yield. Previously, most people's eyes focused on the dividend index of A-shares, admittedly, from the perspective of market performance, the dividend index of A-shares has outperformed the dividend index of Hong Kong stocks in recent years, but the dividend index has a very distinctive feature: dividends and stock prices are inversely proportional, due to the large adjustment of Hong Kong stocks in the early stage, the dividend yield of the dividend index of Hong Kong stocks has significantly exceeded the dividend index of A-shares. In the context of declining interest rates, Hong Kong stocks, which have taken the lead in adjustment, currently have very excellent safety barriers, and the dividend assets in the Hong Kong stock market may have higher investment cost performance. In addition, the dividend yield of the same company in Hong Kong stocks is generally much higher than that of A shares. For example, the familiar "four major banks" and "three barrels of oil" have higher dividends in Hong Kong stocks than A-shares. The reason for this is that the cash dividends of listed companies are paid in shares, not in stock prices. As of 24/6/4 the Hang Seng AH Premium Index is 138.8. Therefore, if the dividend per share of the same listed company is the same in both places, the same amount can hold more shares in Hong Kong stocks and pay higher cash dividends, resulting in a relatively higher dividend return.
Q: Do you think that high dividend investment is preferred for Hong Kong stock dividends, please analyze the main logic of the Hong Kong stock dividend strategy?
Yu Zhanchang: I think the main logic of the dividend strategy of Hong Kong stocks is as follows.
1. The valuation is relatively "cheap", and the capital is high and low
Recently, funds have returned to the Hong Kong stock market, and southbound funds have been net buyers for 11 consecutive weeks from March to April. Among the world's major indices, the valuation of the Hang Seng Index is relatively low, and the price-earnings ratio is around 15% in the past decade. At the same time, the Fed's interest rate cut signal and the sharp depreciation of the yen have hurt the investment returns of Japanese stocks, attracting funds to switch.
2. Hong Kong stocks have cheaper valuations and higher dividend yields
As of 24/6/4 Hang Seng AH Shares Premium Index 138.8, H shares have a higher dividend yield due to cheaper valuations, with the same dividend. As of the first quarter of 2024, the dividend yield of Hong Kong stocks of companies listed in both A/H and H is on average twice that of A-shares, and as of April 26, the dividend yield of the Hang Seng Index is 4.08%, the dividend yield of the Shanghai Composite Index is 2.73%, and the dividend yield of the Nikkei 225 is 1.60%.
3. Favorable policies, continue to be optimistic about undervalued Chinese assets
First, the China Securities Regulatory Commission issued a blockbuster document, and then foreign institutions repriced Chinese assets, and under the favorable policies, the cost performance of Hong Kong stock investment has increased rapidly. On April 19, the China Securities Regulatory Commission issued the "Five Capital Market Cooperation Measures with Hong Kong", aiming to further expand the interconnection between the two markets, which is expected to improve the liquidity of Hong Kong stocks, and then on April 23, UBS Group upgraded the ratings of A-shares and Hong Kong stocks to "overweight", and upgraded the ratings of Chinese stocks to "overweight", highlighting the initial optimism that the Chinese market is starting to gradually improve. The rising risk of stagflation in overseas markets, coupled with the expected recovery of China's economic and real estate policies, has brought about a rapid rebound in Hong Kong stocks recently. Recently, Hangzhou's new policy has added another impetus, and A-shares and H-shares have continued to rise. In addition to transactional funds, long-term funds have also begun to pay more attention to high-dividend assets in Hong Kong stocks, among which Hang Seng China Central Enterprises are favored.
Q: As Hang Seng's first market-based broad-based index focusing on central enterprises, what are the characteristics of the Hang Seng China Central Enterprises Index?
Yu Zhanchang: Most of the constituent stocks of the Hang Seng China Central Enterprises Index itself have high dividend attributes. On the whole, the static dividend yield of the Hang Seng China Central Enterprises Index as of 2024/5/10 is about 6.15% (the average dividend yield in 23 years is about 7.3%, and the dividend yield at the end of 23 is about 7.4%, and the static dividend yield has decreased due to the continuous upward trend of the index this year), which is significantly higher than the 4.02% of the Hang Seng Index. In addition, in terms of the proportion of constituent stocks, stocks with static dividend yields higher than 7% account for about one-third of the index weight. Considering that most of the major constituent stocks in the Hang Seng China Central Enterprises Index have the characteristics of high southbound proportion & high dividends, coupled with the unique advantages of central enterprises in the Hong Kong stock market, with the continuous deepening of the reform of state-owned enterprises and the continuous improvement of the operating efficiency of central enterprises, the improvement of ROE of central enterprises will become a key factor to promote the increase in capital allocation and the long-term valuation of high-quality enterprises. If the dividend tax is reduced or abolished on this basis, it may further enhance the allocation value of the index and attract more southbound funds to add to the index. Since the beginning of this year, the market has also proved the investment value of the index: since the beginning of the year, the Hang Seng China Central Enterprises Index has performed better than the Hang Seng Index and the Hang Seng High Dividend Yield Index.
From the perspective of southbound funds, the proportion of southbound funds' holdings in the Hang Seng China Central Enterprises Index is higher than that of the Hang Seng Index. If the dividend tax is abolished, the Hang Seng China Central Enterprises Index may be subject to higher valuation impact than other indexes from a static point of view. From a dynamic point of view, as the attractiveness of Hong Kong stock assets to the south increases, the southbound continues to increase the allocation of Hong Kong stock assets, which is also more favorable to the Hang Seng China Central Enterprises Index.
From a micro perspective, most of the constituent stocks of the Hang Seng China Central Enterprises Index have a higher premium rate for the underlying AH listed in the two places. According to the statistics of the 23 AH dual-listed targets in the constituent stocks, the vast majority of stocks have an AH premium rate higher than 150 (data as of 2024/5/8), and the corresponding reading of the Hang Seng AH Premium Index, which measures the overall price comparison between the two markets, is about 143 on the day. If the dividend tax on Southbound Stock Connect is abolished, southbound funds with additional allocations to Hong Kong stocks may prefer the Hang Seng China Central Enterprises Index, which has a large number of higher-discount stocks, or corresponds to higher investment allocation value and valuation flexibility.
Q: Looking ahead, how much room is there for Hong Kong stocks?
Yu Zhanchang: In the environment of market consolidation, the Hang Seng China Central Enterprises Index still has allocation value. In the short term, the Hang Seng China Central Enterprises Index focuses on blue-chip central enterprises, and most of the constituent stocks are high-dividend assets, which is expected to benefit from short-term market shocks, potential adjustments to the dividend tax policy for Hong Kong stocks, and market concerns about growth and external disruptions. Under the market consolidation situation, deterministic assets have comparative advantages, dividend assets with stable profits and strong ability to resist market fluctuations are expected to continue to outperform, and the recent pullback of dividend assets also provides certain allocation opportunities. In the medium term, the essence of a high-dividend strategy is to provide stable dividend cash flow in a macro environment with declining overall returns, so its core value comes from consistent and stable returns on the numerator side, and provides better relative returns when the relative return rate (g-r) declines. In the event of weaker medium-term growth or declining long-term interest rates, dividend assets will further highlight their investment value by providing stable cash flow returns.
The root cause of the current weak market and growth pressure is credit contraction. This was further evidenced by weaker-than-expected financial and credit data in May. To solve this problem, fiscal leverage and financing costs are indispensable means, and scale is as important as speed.
Looking ahead, for the overall market of Hong Kong stocks, under the baseline scenario, it is expected that the policy is still expected to continue to be introduced, but the "strong stimulus" is unrealistic, so the market may show more volatility and consolidation in the short term. How much room is there for the overall market in the future? Among the three main drivers of the market, the risk premium has been mostly repaired, and the short-term room for the risk-free rate is limited, and profitability is the key to opening up more space in the market, but this is highly dependent on the opening of the credit cycle. Therefore, before more catalysts emerge, the Hong Kong stock market may fluctuate at the current level (18,000 points of the Hang Seng Index). However, Hong Kong stocks still have a comparative advantage over A-shares, mainly due to low valuations, more sensitive to liquidity, and better-profitable cycles and Internet and other sectors account for a larger proportion of Hong Kong stocks, and most of the real estate and manufacturing chains with pressure on earnings are concentrated in A-shares. In addition, if the Fed starts to cut interest rates this year, Hong Kong stocks will also benefit more from the linked exchange rate system than A-shares.
Structural opportunities are more noteworthy than index performance, and the advantages of the "dumbbell" allocation strategy composed of three main lines are highlighted.
What is a "dumbbell" configuration? That is, the "dumbbell" configuration composed of the three main lines of dividends, technological growth, midstream overseas and service consumption. On the one hand, high dividends may regain the benefits of short-term market shocks, expectations of potential tax policy adjustments, and market concerns about growth under the latest inflation and social finance data to hedge against the decline in long-term interest rates. On the other hand, at the other end of the dumbbell strategy, high-quality growth sectors such as Internet, consumer electronics and technology hardware, overseas targets in midstream manufacturing, and consumer services including travel, tourism and leisure and entertainment are also worth paying attention to.
The Hang Seng Central Enterprises ETF (513170), which superimposes the three core elements of "high dividends, low valuation, and pure central enterprises", exclusively tracks the Hang Seng China Central Enterprises Index, focusing on blue-chip leading central enterprises in the fields of finance, energy and telecommunications.
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