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Matthews Asia increases HK exposure

The firm believes that there is a value play among beaten-down Hong Kong stocks.
Robert Horrocks, Matthews Asia

The outlook for Hong Kong’s economy remains gloomy. It has slipped into recession and remains fragile due to six months of social unrest and increasingly violent protests that have hit the tourism and retail industries. In addition, the market, to a certain extent, is subject to external headwinds from the trade dispute between the US and China.

The Hang Seng Index this year has underperformed the MSCI AC ex-Japan Index by half, according to data from FE Analytics.

Hang Seng Index vs MSCI AC ex-Japan Index

Source: FE Analytics. In US dollars.

However, Robert Horrocks, Matthews Asia’s San Francisco-based chief investment officer, believes that Hong Kong stocks continue to provide opportunities to investors.

“The Hong Kong market has been much weaker, while Asia as a whole has been very strong this year. But the concerns over the Hong Kong market has led stock valuations to be more attractive, especially for the strong businesses,” he told FSA on a recent visit to Hong Kong.

Horrocks, also co-manager of the firm’s Asia ex-Japan Dividend Fund, declined to give examples of strong Hong Kong businesses that fit into the value category. He would only say that his team has made moderate trims of some A-share positions in exchange for building up exposure to Hong Kong company stocks.

Matthews Asia – Asia ex Japan Dividend Fund’s Top 10 holdings

Source: Fund factsheet. 30 September 2019

Matthews Asia – Asia ex Japan Dividend Fund’s country allocation

Source: Fund factsheet. 30 September 2019

“When we look at the future growth of China, Hong Kong is obviously going to be a big beneficiary of that growth, and generally, Hong Kong companies are well-managed.

“[Despite] whatever concerns investors have about the market, which are understandable, we see good long-term value there.”

Like Horrocks, James Ashley, head of international markets strategy at Goldman Sachs Asset Management, said recently that the market is likely to benefit from the long-term structural changes underway in mainland China.

US recession risk

Separately, Horrocks said the likelihood of a mild recession in the US is one of the key risks to his investment thesis.

Because of that, he has a bias for domestically-oriented companies in Asia that are more likely to be resilient against external headwinds.

“They are less exposed to changes in US policy. It just makes more sense to have a focus on those companies,” he said.

Given that Horrocks prefers domestically-oriented companies, he favours consumer-related sectors.

Matthews Asia – Asia ex Japan Dividend Fund’s sector allocation

Source: fund factsheet

“So there is a preference for food and beverage businesses as well as good retail companies,” he said.

The banking sector is likely to benefit from domestic economic growth, as well as insurance companies, especially in Southeast Asia, he added.

A mix of high and low dividends

Horrocks also noted that while his fund is a dividend-focused product, it invests in companies paying either high or low dividends.

The aim is to have a balanced portfolio that best provides both yield and growth for investors, he said. The dividend yield of the fund is 3.18%, according to its factsheet, which Horrocks believes is “at market”.

“There is a potential trade-off that the company is growing really slowly if it is a high dividend-yielding company.

“Meanwhile, those companies with a dividend yield of just 1-2% may require more investment for the future and may have growth rates of around 10-15%,” he said.


The Matthews Asia ex Japan Dividend Fund versus its benchmark and sector

Source: FE Analytics. In US dollars. Note: The fund is available to retail investors in Hong Kong and only to accredited investors in Singapore.

Part of the Bonhill Group.