The Hong Kong market is looking attractive due to its defensive characteristics and its low exposure...
The Hong Kong market is looking attractive due to its defensive characteristics and its low exposure to technology, media and telecom stocks.
Over the 12 months to 30 November the Hang Seng stock index was up 3.86%, in sterling terms, compared to the Taiwan index returns of -26.84% and returns by the South Korean index of -45.32%. Over the same time period the FTSE All Share fell by 1.51%.
Jeremy Whitley, investment manager at Edinburgh Fund Managers says: "We are quite overweight Hong Kong and have been for around two to three years because it is one of the most liquid markets in the region. It has the best record of free-trade policy in the region and we like its proximity to China and the opportunities there."
Robin Parbrook, fund manager at Schroders, says: "Hong Kong has a lot of banks and real estate stocks, which perform quite well if the US interest rate, to which Hong Kong rates are pegged, goes down, which seems likely, as the US economy slows."
Parbrook says the Hong Kong economy is stable, with government finances looking healthy but he notes that the momentum now appears to be slowing down.
He also finds his general bullishness tempered by the fact that valuations are relatively high.
"Hong Kong performs well relative to other Asian stock markets, so there is not much significant scope for upward re-ratings."
Parbrook points out that the MSCI index is going to make index changes as it moves to a free floating market capitalisation. In doing so, Asia's position in global indices will be decreased as many Asian firms are family owned. Hong Kong will be one of the biggest losers of the MSCI changes, with Taiwan the greatest beneficiary.
He says: "The biggest call next year for fund managers will be when to sell interest rate sensitive stocks in Hong Kong and buy technology stocks in Taiwan."
Both Whitley and Parbrook find the Hong Kong financials and residential property sectors attractive.
Whitley says: "Hong Kong banks are very well capitalised. If they restructured their balance sheets they could pay the capital back to their shareholders. They are reluctant to do this but the pressure is building for it to happen. There is very little demand for mortgages and lending because companies have not needed it. The Asian recovery was on the back of exports. Like the rest of Asia, Hong Kong is experiencing a lower consumer demand than it should."
He notes that the residential property has fallen 50%, in dollar terms, since its peak before the Asian crisis in 1997-1998 but Whitley believes there could be a turnaround and if this occurs, demand for mortgages will increase.
Edinburgh has holdings in Dow Heng and HSBC, which Whitley says has done well recently as it has the dominant market share in Hong Kong. He finds Dow Heng attractive because it is well capitalised and he hopes it will undergo some form of restructuring.
Whitley is underweight telecoms, particularly China Mobile, where there are concerns about valuations and regulatory issues.
Partner Insight Video: Advisers have had to adapt to the changing investment landscape.
Investment trust savings scheme