Source: Dai Qing Strategy Research
Author：Dai Qing，Huang Kaihong
Hong Kong stocks have rebounded recently, and the Hang Seng Technology Index is ahead, while the dividend index has outperformed the market. Some investors are concerned about whether the high dividend strategy still has an advantage.
Summary:
The domestic central government will increase leverage, Hong Kong, China will lower the stock stamp duty, overseas liquidity will become marginal relaxation, the Hang Seng Technology Index will rebound, the high dividend index will lose, and telecom and energy performance will lag behind.
1) Domestic support policies continue to be introduced, and more 1 trillion yuan of treasury bonds will be issued domestically; 2) exchanges between China and the US will be more frequent, focusing on the November China-US dollar first meeting plan; 3) Hong Kong, China will lower the stock stamp duty to increase the liquidity of the Hong Kong stock market; 4) Overseas, 10-year US bond yields fell back to 4.85% on Thursday night, improving liquidity marginally. The Hang Seng Tech Index rebounded, outperforming the market and dividend strategy style. By industry, telecom, energy, and finance, where institutions have heavy holdings, have clearly fallen short of the Hong Kong stock market benchmark.
We have observed that the prosperity of dividend assets has not changed much recently. Fluctuations in stock prices may be mainly due to changes in market style, and the market is concerned about whether the dividend strategy group will end.
Since the second quarter, since the high dividend strategy has outperformed index benchmarks for the most part, the stock price level of related dividend assets has accumulated a large amount of excess income. When the group ends is the focus of the market's concerns. This report adopts the application environment of the historical reversal of high dividend strategies. The main point is that low domestic interest rates are combined with high overseas interest rates. If interest rates on Chinese bonds rise plus interest rates on US bonds, the dividend strategy may lose in stages.
In the short term to come, if interest rates on Chinese bonds rise and interest rates on US bonds fall, the dividend strategy may lose the index in stages.
1) In the past six months, overseas risk-free interest rates have risen, and risk appetite has been suppressed. The market has embraced short-term, highly deterministic dividend assets. If the mid-term US debt falls back at the top of the “M” type, or it may help capital to find long-term growth stocks again.
2) Currently, the domestic economy is recovering weakly. The yield position of Chinese bonds is low, and domestic liquidity is relatively abundant, but high-quality assets with high profit returns are scarce. There is a contradiction between high-quality assets and abundant liquidity in the market. More capital has chosen dividend assets that are more attractive than deposit interest rates. As the domestic economic structure is optimized, local debt risks are gradually resolved, real estate issues are gradually improving, and economic momentum may gradually increase, corresponding to the rise in Chinese bond yields, it is expected that the phenomenon of bundling of dividend assets may be partially “loosened” in stages.In the medium to long term, we still recommend increasing dividend assets on dips.The effects of domestic policies in the future need to continue to be observed. At the same time, the Hong Kong stock market will still face uncertainty for a long time. The US and other regions will hold general elections in 2024, it may be difficult for the long-term inflation center overseas to decline rapidly, and the long-term growth issues that some overseas institutions are concerned about will be difficult to resolve quickly.
In terms of strategy, the “three factors” resonated in the fourth quarter and were optimistic about the rebound in Hong Kong stocks, focusing on growth style.First, there is a marginal improvement in Hong Kong stock earnings; second, US debt may fall after peaking according to the “M” pattern; and third, there may be an improvement window for Sino-US relations in November. In terms of allocation: 1) Improved overseas liquidity, focusing on the Hang Seng Technology Index, Internet retail, innovative drugs, and gold. 2) The improvement of Sino-US relations favors export chains such as semiconductors, new energy, and textiles. 3) Increase high-dividend assets on medium- to long-term dips.
1. Favorable domestic policies are frequent, and the dividend strategy outperformed the market
The domestic central government will increase leverage, Hong Kong, China will lower the stock stamp duty, Sino-US relations will be repaired, overseas liquidity will be marginalized, and the Hang Seng Technology Index will rebound, outperforming the high dividend index throughout the week.
Last week (October 20 to October 27), 1) China announced that it will issue 1 trillion yuan of additional treasury bonds to support post-disaster recovery and reconstruction and enhance disaster prevention, mitigation and relief capabilities. The fiscal deficit rate will increase, which means that the central government will increase leverage to support economic development; 2) the China-US Financial Working Group will hold a video conference on November 25, and market sentiment is warming; 3) Furthermore, Hong Kong, China will lower the stock stamp duty from 0.13% to 0.1%, increasing the attractiveness of the Hong Kong stock market; 4) Overseas, the 10-year US Treasury yield exceeded 5.0% Afterwards, it fell back to 4.85% on Thursday night, and the Hang Seng Technology Index rebounded and outperformed the market and dividend strategies on Friday. Last week, the Hang Seng Hong Kong Stock Exchange High Dividend Index and the China Securities Hong Kong Stock Connect Dividend Index rose by 0.98% and fell 0.73% respectively, outperforming the market.
Starting from the benchmark, most of the components of the high dividend index of Hong Kong stocks come from industries such as telecommunications services, utilities, energy, materials, banking, real estate, capital goods, and transportation.The Hong Kong stock market has a number of indices representing high dividend stocks. We used the China Securities Hong Kong Stock Connect Dividend Index and the Hang Seng Hong Kong Stock Connect High Dividend Index as benchmarks to analyze their constituent stock industry distribution. Among the constituent stocks of the China Securities Hong Kong Stock Connect dividend index, banks, energy, transportation, materials, and telecommunication services account for the highest share; banks, real estate, energy, utilities, materials, and capital goods account for the highest share of industries belonging to Hang Seng Hong Kong Stock Connect Hong Kong Stock Connect.
By industry, some sectors in the high-dividend industry had excess earnings last week, but the telecommunication services, energy, and finance sectors with heavy institutional holdings fell short of the Hong Kong stock benchmark.Last week, nearly half of the high-dividend industry indices outperformed$Hang Seng Index (800000.HK)$, recorded excessive positive income. Among them, the five best performing industries were the food and beverage (cumulative increase of 3.4%, same below), capital goods (3.4%), utilities (2.7%), materials (2.4%), and transportation (1.9%). However, the telecommunication services, energy, and financial industries, which the market is paying more attention to, are under greater pressure to adjust.
We have observed that industries that underperformed last week have not changed much from the perspective of prosperity. Fluctuations in stock prices are probably mainly affected by changes in market style. Since the second quarter, high dividend strategies have mostly outperformed index benchmarks, and the relevant dividend asset stock price level has accumulated a high level of excess income, and some investors are concerned about whether dividend assets will continue to lose in the future. This report gives a signal of the end of the group through the application environment of the historical reversal of high dividend strategies. We believe that there is a chance for Hong Kong stocks to rebound in the fourth quarter. The growth style may prevail, a high dividend strategy, or a phased loss of benchmarks, but we are still optimistic about long-term investment opportunities in high-dividend assets.
2. Hong Kong stock high dividend strategy signal the end of the group
2.1. Overseas risk-free interest rates are rising, risk appetite is being suppressed, and the market embraces “short-term” dividend assets with high certainty, and when interest rates on US bonds fall or boost capital to find long-term growth stocks again
First, the fact that it is relatively insensitive to overseas liquidity is one of the reasons the dividend index exceeds earnings.The excess income of the dividend index is highly correlated with the actual yield of 10-year US bonds. The reason behind this is that among dividend index constituent stocks, growth stocks account for relatively little, and index performance is relatively insensitive to changes in overseas liquidity. Therefore, when risk-free interest rate expectations rise in the market, the index's “killing valuation” phenomenon is not serious; even, some financial stocks in the dividend index benefit from rising interest rates.
As overseas liquidity tightened, the risk appetite of the Hong Kong stock market as a whole declined, and the dividend style outperformed the market.However, the share of growth stocks among the constituent stocks of the Hong Kong broad-based index is high, so the index performance is greatly affected by liquidity. When risk-free interest rates in the market rise, valuations of some growth stocks are under pressure, dragging down the performance of broad-based indices such as the Hang Seng Technology Index. As a result, risk-free interest rates are rising, and the suppression of the broad-based index is greater than the dividend index. The dividend index often outperforms the market index.
Conversely, when overseas liquidity becomes loose, capital re-searches for growth stocks over a long period of time. At this time, it is difficult for dividend strategies to achieve better performance.Growth sectors such as the Hang Seng Technology Index, the Internet, pharmaceuticals, and semiconductors benefit from this market environment when risk-free interest rates decline, liquidity is abundant, and capital finds assets with higher returns. Growth stocks account for relatively few dividend index constituent stocks, while growth stocks account for a higher proportion of broad-based index constituent stocks. Therefore, when overseas liquidity becomes easier and US bond yields fall, the dividend index valuation expansion flexibility is not as flexible as the broad base index, and the broad base index performs better. The inflection point of the transition from overseas liquidity to easing is also the point where high-dividend strategies have been phased out.
Currently, interest rates on US bonds may be at an “M” peak period, and Q4 may fall. In the medium to long term, the rise in the center of US inflation may limit the decline in US bond yields.Currently, overseas liquidity is tight. The main reason is that major central banks, led by the Federal Reserve, have begun a cycle of interest rate hikes and downsizing to cope with excessive overseas inflation. Once US inflation, which restricts the monetary policy of the Federal Reserve, begins to slow down, the pressure on tightening overseas liquidity eases, as evidenced by a decline in US bond yields. However, it may be difficult for the long-term center of US inflation to decline rapidly, the degree of relaxation of the Federal Reserve's policies or the level before the pandemic, and it may be difficult for the improvement in overseas liquidity to return to what it was before 21 years.
2.2. The decline in domestic treasury bond yields often increases the attractiveness of dividend strategies, while a phased recovery in interest rates may mean that defensive dividend assets may lose relatively
When treasury bond yields fall, the dividend strategy is relatively superior.Yield on 10-year Chinese treasury bonds can to some extent characterize expectations of China's economic growth. When the momentum of the domestic economy weakens, the return on investment of most industries falls, corresponding to the decline in treasury bond yields. Capital tends to group together assets with high certainty for profit. At this time, the dividend style with relatively high certainty tends to prevail, outperforming the market index.
In contrast, during periods of rising treasury bond yields, the performance of dividend assets often outperformed the performance of market indices.When the momentum for domestic economic growth increases, along with rising Chinese bond yields and a decline in risk aversion in the market, investors prefer economy-related companies or companies with better growth, and the performance of high dividend-related assets often outperforms the performance of the general market index.
The domestic economy may continue to improve marginally in the short term in the future, and the long-term effects need to be observed.Currently, the domestic economy is recovering weakly, the yield position of Chinese bonds is low, and domestic liquidity is relatively abundant, but high-quality assets with high profit returns are scarce. There is a problem that high-quality assets do not match the abundant liquidity in the market. More capital has chosen dividend assets with higher interest rates than deposit interest rates. As the domestic economic structure is optimized, local debt risks are resolved, and real estate issues are effectively resolved, domestic economic momentum may gradually increase, corresponding to the rise in Chinese bond yields, and it is expected that there may be some “loosening” of dividend assets during this period. In the medium to long term, the effects of the policy need to continue to be observed.
In summary, in the next quarter, when US bond yields fall and Chinese bond yields rise, the growth style of Hong Kong stocks may be better than the dividend style.If the momentum for domestic economic growth is weak, corresponding to a decline in Chinese bond yields, while overseas liquidity is tightening, and US bond yields rise, the value sector represented by dividend assets with stable high dividends can easily gain market favor, and high dividend strategies often outperform the market's performance. Conversely, if the recovery of the domestic economy drives the yield on Chinese bonds to rise, the long-term returns of companies related to it rise, and the liquidity of overseas markets is abundant, and US bond yields decline, the market may choose more growing companies, and dividend assets may lose in stages. In the medium to long term, we still recommend increasing dividend assets on dips, mainly because the Hong Kong stock market will still face great uncertainty, the US and other regions will hold general elections in 2024, it may be difficult for the long-term inflation center overseas to decline rapidly, and the long-term growth issues that some overseas institutions are concerned about cannot be resolved quickly.
3. Currently, energy, transportation, banking and telecommunications industries have high dividend rates
Judging from the dividend rate, most industries have a dividend rate of more than 5%, which is highly attractive.The historical quartile of the Hong Kong stock market with a dividend rate of 90% or more is: capital goods (99%), banking (98%), utilities (98%), insurance (97%), real estate (94%), and diversified finance (92%). The industries with the highest dividend yield are: energy (10.2%), transportation (7.5%), banking (7.4%), telecommunications services (7.3%), and capital goods (6.3%).
Since the beginning of the year, Guojun's Hong Kong Stock Exchange High Dividend Package (excluding dividends) has outperformed the market. Since the beginning of the year (October 27), the high dividend strategy has remained relatively dominant. Among them, the net value of the China Securities Hong Kong Stock Connect dividend index is 0.95, and the net value of the Hang Seng Hong Kong Stock Connect high dividend index is 0.88. The net value of Guojun Hong Kong Stock Exchange (excluding dividends) was 0.98, outperforming the Hang Seng Index net value of 0.87 and the Hang Seng Technology Index net value of 0.92.
4. In the long run, dividend assets are becoming the new “core asset” of Hong Kong stocks
A high dividend strategy can reap stable excess profits in an uncertain macro-environment.Judging from historical experience, high dividend strategies are relatively more effective in volatile markets and weak markets, due to their defined characteristics of dividend dividends, undervaluation, and low stock price fluctuations. Compared to A-shares, high-dividend varieties of Hong Kong stocks have greater advantages, higher after-tax dividend rates compared to A-shares, and more room from the perspective of PE/ROE price/performance ratio. In the Hong Kong stock market, compared with other industries, the foreign risk exposure of high-dividend varieties is lower and relatively more stable.
Furthermore, in a context where the development path of emerging industries is not obvious and risk-free interest rates are declining, the dividend strategy is still the optimal strategy at present.At present, domestic industrial upgrading is still ongoing, but the main line is not obvious. Furthermore, interest rates on domestic bank deposits have declined. In a context where the path of emerging industries is not obvious and risk-free interest rates are declining, the dividend strategy is still the optimal strategy at present.
In the future, if domestic real estate receives policy support, the high dividend strategy is expected to add further momentum and outperform the market.From the perspective of direction and industry comparison, if the domestic real estate industry receives more policy support in the future, pro-cyclical industries such as real estate finance, which are representative of high dividends, are expected to perform better, or drive high dividend strategies to outperform the market.
Editor/Jeffrey