Hong Kong stocks battered

Asset Class in Focus

Ongoing protests and the trade dispute have hit the local market, but diversified Hong Kong equity funds remain resilient, shored up by mainland allocations.

Hong Kong’s Hang Seng index has plunged 9% so far in August, wiping out all of its gains this year as investors retreat from the SAR’s escalating and highly visible two-month political crisis.

The benchmark has underperformed all the major Asia indices this year, dipping into the red earlier this week, and lagging the MSCI World Index, which has posted 11.38% return year-to-date, according to FE Analytics data.

The stocks of companies tied closely to domestic consumption and tourism have been particularly affected. Cathay Pacific and jeweller Chow Tai Foo, for instance, have suffered sharp share price declines.

Several dedicated Hong Kong equity funds have also contracted in value. There are 43 authorised for sale to Hong Kong and/or Singapore investors, of which 22 are actively managed. Those funds that include significant allocations to mainland China companies have held up better. While the Hang Seng index has declined, the MSCI China index has retained some of its gains this year, and is still up 4.10%.

The best three performers so far this year are active funds managed by First State, Manulife and JP Morgan. Their portfolios, which focus on growth, combine holdings of H-shares (China incorporated companies, listed on the Hong Kong Exchange (HKEX), P-shares (Chinese companies incorporated outside China and listed on HKEX) and A-shares (Shanghai- or Shenzhen-list China stocks), as well has shares of Hong Kong companies.

Over a longer term horizon, the funds have also done well: they have some of the highest three-year cumulative returns in the sector – albeit with higher than average volatility. First State is again at the head of the list, with 35.88% total return during the period, driven by alpha of 6.03%, according to FE data (see table below).

The worst three performers year-to-date are passive index trackers: the China AMC Hang Seng Stock Connect Hong Kong Small Cap Index ETF (-7.10%), the HS Corporate Sustainability Index Fund (-4.72%) and the Mirae Asset Horizons Hang Seng High Dividend Yield ETF (-4.45%). All three are also among the worst performers over three years.

Their Hong Kong domestic focus is reflected in the portfolio of one of the poorest performing active funds this year, the Eastspring Investments Hong Kong Equity Fund. Its has lost 4.35% since the 1 January, and has a three-year cumulative return of only 3.56%, according to FE data.

Investors’ expectations

Turning to investors, the third quarter issue of Last Word Media Research’s detailed “Future Flows” analysis identified a strong preference for China equities over other region’s stocks among Hong Kong fund selectors.

Separately, the recent Schroders Global Investor Study 2019 found that 64% of Hong Kong investors did not achieve their investment objectives, which is far higher than their Asia (56%) and global (51%) peers who also felt the same.

The study’s findings also suggested that “Hong Kong investors are prone to making knee-jerk reactions during market volatility”.

The research showed that the average investment horizon amongst Hong Kong investors is just over two years (2.1), which is less than their Asia (2.5) and global (2.6) counterparts – and far shorter than the five-year investment horizon that most investment advisors suggest.

Moreover the study warns that “Hong Kong investors are still over-optimistic on their investments”.

According to Schroders, the study surveyed 25,000 investors (500 from Hong Kong) in 32 markets who intend to invest €10,000 ($11,152) in the next 12 months.

 


Best and worst performing Hong Kong equity funds year-to-date

*Year-to-date return %

**3-year cumulative return %**Annualised return %Alpha

**Annualised volatility %

First State Hong Kong Growth

5.35

35.8811.186.03

16.32

Manulife Dragon Growth

3.37

26.948.312.34

19.50

JP Morgan SAR Hong Kong

2.30

22.917.592.03

17.07

#Sector Average

-0.04

13.885.070.00

15.19

Hang Seng Index

0.14

21.277.57

16.53

Eastspring Inv Hong Kong Equity

-4.35

3.563.10-1.38

14.47

BOCIP Hong Kong Low Volatility Equity

-4.35%

17.986.502.15

13.49

BOCIP Hong Kong Value

-4.10

7.863.81-0.78

14.36

Source: FE Analytics. Data in US dollars. *1 January – 15 August 2019. **15 August 2016 – 15 August 2019. #Funds authorised for sale to Hong Kong and/or Singapore retail investors, and includes passive funds.

Hang Seng Index and Hong Kong equity fund average vs other leading indices

Source: FE Analytics. Year-to-date returns in US dollars.

 

 

 

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