This article was compiled from Dongwu Securities's “Hong Kong Stocks Embrace “Core Assets”, Highlight the Appeal of the New Economy” and CICC's “Combining Factors Driving Hong Kong Stocks to Continue to Lead the New Economy”
Abstract: The Hong Kong stock market has rebounded since April, but the magnitude is lower than that of US stocks and A-shares. According to Dongwu Securities analysis, Hong Kong stocks are currently attractive for allocation, and positive factors in the market are continuing to ferment in terms of both profit and valuation. Especially in the long run, as more high-quality new economy companies go public in Hong Kong, it will definitely bring a source of fresh water, which will help increase both the liquidity and valuation of Hong Kong stocks.
1. In terms of profit, domestic economic recovery supports the rise in corporate profits
According to Dongwu Securities analysis, Hong Kong stocks are at a historic point of allocation, and the market continues to have positive factors in terms of both profit and valuation.
In terms of profit, Dongwu Securities expects the domestic GDP growth rate to continue to rise in the 3rd and 4th quarters, reaching or even exceeding 5% in the fourth quarter. The economic growth troika is gaining strength, helping the profits of new economy companies such as consumption and technology continue to grow.
According to CICC analysis, as of August 29, 507 of the 711 branches of the MSCI China Index had published their 2020 interim reports. Judging from FactSet statistics, the overall performance growth rate rebounded from -14% in the first quarter to 12.3% year-on-year. Considering that the economic growth rate continues to pick up, it believes that corporate profits have gone through the most difficult period and are gradually recovering from their low in the first quarter.
2. In terms of valuation, the Hong Kong stock market is more attractive
Compared to A-shares, Dongwu Securities emphasized that Hong Kong stocks are more attractive.
First, the valuation of Hong Kong stocks is lower than that of A shares (the TTM price-earnings ratio of the Hang Seng Index is 11.6 times, lower than 16.3 times that of the Shanghai Composite Index). This valuation gap continues to attract mainland capital southward. Since this year, there has been a cumulative net inflow of southbound capital of HK$420 billion.
Second, global liquidity easing has brought a steady stream of capital to the Hong Kong market. Central banks around the world have released large amounts of water, and non-US assets have appreciated. Since March, the Hong Kong dollar has continued to have a strong exchange parity of 7.75 against the US dollar. HIBOR has declined in the past month. The decline in capital prices indicates that there is a large amount of capital in the Hong Kong market.
According to Dongwu Securities's analysis, in addition to factors such as profit and valuation, the second listing of China Securities in Hong Kong will also be an important factor in attracting global capital to allocate Hong Kong stocks in the future.
3. Embracing the new economy, the liquidity and valuation of Hong Kong stocks will both increase
Last week was the peak period for the release of 2020 interim results. Although the Hong Kong stock market as a whole remained range-bound, the new economy sector once again gained upward momentum.
The Hang Seng New Economy Index, which focuses on consumption, information technology, and communications, has risen 30% since February 19, outperforming the Hang Seng Index's performance by 39% during the same period, and excess earnings have maintained a rapid expansion trend since April this year.
In the short term, the imminent inclusion in the Hang Seng Index and the Hang Seng State-owned Enterprises Index has contributed to the recent rise in new economic sectors, such as Ali, Xiaomi, and Meituan. In the long run, Dongwu Securities emphasized that as more high-quality new economy enterprises go public in Hong Kong, it will definitely bring a source of vitality, which will benefit both the liquidity and valuation of Hong Kong stocks.
At the end of July 2019, the IT sector accounted for only 16% of the market value of the Hang Seng Index, but by the end of July '20, the share of IT had risen to 25%. According to Dongwu Securities analysis, Hong Kong stocks have long been less liquid than A-shares and US stocks, and are also a valuation depression in the global market. Technology companies such as Tencent, Meituan, and Xiaomi rank in the top ten trading activity of the Shanghai, Shenzhen, and Hong Kong Stock Exchange all year round. Therefore, the future listing of new economy companies in Hong Kong will help increase both the liquidity and valuation of Hong Kong stocks.
According to CICC's analysis, after the component stock adjustment, the weight of the optional consumer and information technology sectors in the Hang Seng Index will rise to 4.2% and 9.5% respectively, while the weight of the two major sectors in the Hang Seng State-owned Enterprises Index will rise to 14.3% and 3.5% respectively. The agency emphasized that the increase in the weight of the new economic sector will attract global investors.
Based on the above logic, CICC and Dongwu Securities expect that the new economy sector will continue to outperform the market, while the consumer, information technology, pharmaceuticals, and communications sectors still have considerable room for growth.
