As the Hang Seng Index nears historic lows, Hong Kong equities present an attractive buying opportunity relative to other counterparts in Asia, says Mark Matthews, managing director and head of research for Asia Pacific at Julius Baer.
The P/B ratio of the Hang Seng Index has dipped under a single multiple only twice. The first happened in 1998, at the height of the Asian Financial Crisis. The other was in 2020, at the start of the Covid-19 pandemic.
The Index also briefly neared the threshold in 2015, when there were some “growth worries” about China and the renminbi. “So, I think there’s an opportunity to own some Hong Kong [equities] because it’s extremely low relative to its history,” says Matthews.
Speaking at Julius Baer’s 2022 market outlook webinar on Jan 25, Matthews reiterates that there are “a lot of good things” in Hong Kong. “The banks — they have a big vacuum in their net interest income because of the low rates since Covid-19, which I think will improve.”
“Specifically, HSBC has a Hong Kong dollar book, which would appreciate if the US dollar goes up, which it probably should. On the other hand, they have a UK book, which I think would also be a beneficiary of the Bank of England being more hawkish than the average central bank,” he adds.
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Shares in HSBC Holdings have risen 5.91% over the past month to HK$56.45 ($9.75) as of Feb 22. Last year, the leading bank was hit by a combination of Covid-19-related business woes and tensions between China and the US.
The counter has completely recovered to pre-Covid-19 levels, matching its share price from February 2020.
However, HSBC took a US$450 million hit owing to Chinese property exposure in its FY2021 ended Dec 31 results. At a briefing on Feb 22, the London-based bank announced plans to initiate share buyback of as much as US$1 billion, on top of an earlier US$2 billion programme.
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As the US tightens its monetary policy, China is doing the opposite. However, Matthews thinks the disparity has been blown out of proportion.
He explains: “I have a feeling that both of them might be a little exaggerated; I don’t think the US is going to tighten as much as the market is pricing in, and I don’t think that China’s going to embark on some really aggressive easing programme. I think they’re reluctant to do that.”
Do as the Chinese do
Beleaguered as they may be, China tech and property are favoured by many investment banks, says Matthews, simply because they have lost so much value over the past year. “Generally, the whole Chinese market has lost so much value,” he adds.
Matthews, however, has neither softened his stance nor his pessimism. “We haven’t become more positive about them. I think with China, there are really two major things that override the marginal loosening that’s going on: common prosperity [is one] and the other is that as the state advances, the private sector retreats.”
When China’s property sector first started running into trouble, investors expected the good quality, well-run private developers to swoop in and snap up assets from the weaker players.
“But actually, it’s the state-owned enterprises that are taking control. So, it looks like that sector is going to become much more public sector dominated.”
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China will soon be run differently that it was before, he warns. “If you believe that the private sector is better at allocating capital than the public sector, and that it provides better returns, then I have to be frank: Don’t expect to make money in China the way you do in other countries.”
That said, it would be foolhardy to ignore the second largest financial market in the world, concedes Matthews. “So, to have no exposure would be very dangerous. When in Rome, do as the Romans do; that means to follow these ideas of common prosperity and the state advances. There are lots of things to do in that space in China, but they’re not in technology or property.”
The chilling effects of last year’s regulatory crackdown still linger in the tech sector. Says Matthews: “I don’t think those companies are going to want to show a lot of profits for the foreseeable future given the move to common prosperity. So, in the absence of growth, you could say they have been derated to levels that one could consider cheap. But the catalyst for them rising, to me, that’s elusive. I don’t see it.”
Japan, nothing to be excited about
Matthews was candid when asked about Japanese equities. “I struggle to really tell people to buy it because I just don’t see why… I feel that there’s not a whole lot to get excited about.”
Still, he acknowledges “a tremendous amount of value” in Japan, with “over 1,000 stocks that are trading below one times book”.
The problem, however, is opening and realising that value, Matthews adds. “The issue is that they like being Japanese, and I don’t blame them. I think it’s a wonderful culture and a wonderful country. But it’s not about growing a lot; it’s not about making lots of money very fast.”
He continues: “As long as the public in a democracy does not want the mandate to change, I think it won’t. [Former Prime Minister Shinzo] Abe tried, and worked a little bit. But basically, Japan will stay being Japan and I think that means the returns will be fairly low, because they don’t aspire to that same kind of big growth that some other places do.”
India starts anew
While Japan lacks energy and hunger, India could not be more different. As Matthews illustrates: “Covid-19 coincided with the end of a 10-year period of sub par growth in India, in part because of a big problem in the banks. They had too many non-performing loans, so they couldn’t lend any money. That’s really why the Indian market underperformed the US by 50%, in the 10 years leading up to Covid-19.”
Following structural reforms, however, the banks have repaired their balance sheets, says Matthews. “We’re looking for at least three years of very strong growth in India, and they have a big digital revolution going on there, but it’s much more in the private equity markets, you don’t see it reflected in the stock market, but it does show up in economic growth for sure.”
He remains overweight on India, where he sees earnings per share (EPS) growth of about 30% this fiscal year, and 20% EPS on average next fiscal year. Investing in an emerging market may appear intimidating, but investors can buy into India’s growth through names like Facebook, now trading as Meta Platforms, says Matthews.
“Facebook is an India play; in terms of users, its market is in India and Brazil. So, you don’t need to go all the way to India to buy exposure to emerging markets. You can just buy it in the Faangs (Facebook, Amazon, Apple, Netflix and Google, which trades as Alphabet).”
Losing relevance?
As Asia comes into its own, the emerging markets label is fast losing relevance. “After China, the two biggest markets are Taiwan and South Korea, which should not be considered emerging markets but they are for technical reasons. Those are proxies on the technology story,” Matthews says.
For now, the US market is still dominant, and the emerging markets are unlikely to outperform the big names.
He adds: “When people invest in emerging markets, they want that big country with a young population and lots of consumption. The problem is that in emerging markets, you have banks that are not very well-run. You have some consumer stocks, but they’re just as expensive as the Faangs. So, why bother going all the way to the other side of the world?”
Photo: Bloomberg
