The high dividend strategy for Hong Kong stocks is an effective “volatile market strategy”

Since the beginning of the year, high dividend strategies have performed well in an environment where market sentiment is weak. In particular, the state-owned enterprise reform policy is expected to be more favorable to the performance of central state-owned enterprises in the high-dividend sector. In retrading history, high dividend price indices have often been able to obtain excess returns in volatile markets; while the full return index is an effective “long-term strategy”. This is closely related to the stable performance return and dividend ratio of high dividend strategies.

Since 2013, valuation, profit, and dividend ratio have respectively contributed -51.2%/+50.9%/+73.6% to the Hang Seng High Dividend Full Income Index. The average dividend rate of the Hang Seng High Dividend Index over the past ten years is nearly 3 percentage points higher than the Hang Seng Composite Index; its average ROE since 2015 was 10.4%, far higher than the Hang Seng Composite Index's 5.1%.

In addition, we have also observed that excess earnings from the high dividend index are significantly negatively correlated with China's manufacturing PMI, while since 2018, there has been a significant positive correlation with interest rate trends on long-term US bonds. This also shows that it is strongly correlated with changes in the fundamentals of the domestic economy and the peripheral liquidity environment.

The congestion level of high-dividend trading in Hong Kong stocks has increased, but it is not yet “overcrowded”

Multiple dimensions measure how crowded high-dividend strategies are. Judging from the relative valuation level, the Hang Seng High Dividend Index is currently in the historical ranking of 32.7% compared to PE of the Hang Seng Composite Index. From a trading perspective, the turnover ratio of the Hang Seng High Dividend Index to the Hang Seng Composite Index has continued to decline since July 2023, and is currently close to an all-time low. Despite a recent recovery in the share of the Hang Seng High Dividend Index's turnover, which is currently around 14%, it is still below the level between May and September-October 2023.

Combined with the volatility and peak of the index's rise and fall, despite a recent rise in high dividend congestion, it is still in a relatively safe position in history, and it has not caused “overcrowding.”

By industry, trading congestion in major high-dividend sectors has increased markedly since December 2023. Currently, the utility, industrial, and financial sectors account for a relatively high share of high-dividend transactions, which are at the historical level of 85.7%/82.8%/82.6% since 2022. We still need to track and observe possible changes in capital adjustments after the popularity of transactions in some sectors has increased.

Differences in valuation systems are the essence of AH dividend rate differences

The dividend rate is essentially the product of the cash dividend ratio and the inverse of PE, and the core of the “dividend rate paradox” brought about by rising stock prices is pricing at a reasonable level of corporate valuation. This is particularly evident among listed companies in AH.

Behind the higher dividend rate of H shares is a “payment” for factors such as the relatively weak liquidity environment for Hong Kong stocks, a high degree of institutionalization of the investor structure, high exposure to external risks, and higher transaction costs.

Considering historical reasons such as differences in the tax system and the liquidity system for A-shares and Hong Kong stocks, it is difficult to change in a short period of time, but currently the AH premium is already at an all-time high of 151, and the depth of Hong Kong stock discounts are obvious compared to the valuation.

We can also select individual stocks with higher relative allocation value by comparing the AH dividend rate difference and AH premium historical quantification after taxation. Taken together, the high dividend strategy of Hong Kong stocks still has a strong allocation advantage.

Configuration recommendation: α in Preferred Determinism

Looking forward to the future, despite the recent downgrade that has exceeded expectations and the introduction of a series of real estate policies is expected to lead to a recovery in market sentiment in the short term, combined with the current sluggish market sentiment, the continued rise in the subsequent market is still awaiting continued implementation of policies and fundamental data. Combined with the re-adjustment of the peripheral Federal Reserve's monetary easing expectations and the risk that interest rates on US bonds will rise above expectations, the valuation of the Hong Kong stock market may still suppress the valuation of the Hong Kong stock market in the first half of the year. We are still optimistic about the allocation value of high-dividend assets in the “volatile market” of Hong Kong stocks.

A “high dividend strategy” represents the characteristics of an enterprise that is both undervalued and willing to pay dividends, but this does not only mean a high degree of certainty in performance, but also includes a large number of procyclical companies with performance growth.

Risk Factors:

1) The introduction of domestic policies and economic recovery fell short of expectations; 2) Overseas central banks tightened currencies beyond expectations; 3) worsened global geopolitical conflicts; 4) Capital position adjustments caused by excessive short-term market congestion.

Editor/Somer