Understanding the Market | How is the current cost-effectiveness of Hong Kong stocks, a low-volatility dividend asset?

Source: Zhang Yidong

1. Review: Continuous revaluation of low-volatility dividend assets

Since the beginning of 2022, we have continuously recommended high-dividend quality state-owned value stocks in the Hong Kong stock market, and proposed that "northbound funds" are the main driving force for the revaluation of value stocks in the Hong Kong stock market.

• On the one hand, in recent years, the Hong Kong stock market has been continuously impacted by the withdrawal of foreign capital. However, state-owned enterprises represented by the "three oil giants," "three major telecom operators," and "four major banks" have exhausted their negative factors and have become less affected by foreign capital, instead entering into an independent market trend due to their low-volatility dividend characteristics.
• On the other hand, with China's risk-free rate of return falling below 3%, high-quality assets with low-volatility dividends are relatively scarce. Therefore, Hong Kong stocks with dividend yields of 8% or even higher have gained favor from domestic investors. Long-term funds from insurance, pension funds, and banks in mainland China have continued to increase their holdings, gradually gaining pricing power over low-volatility dividend state-owned stocks listed in Hong Kong.

Looking back at the performance of the Hong Kong stock market in 2023, the Hang Seng Index High Dividend Yield Cumulative Index outperformed the overall Hong Kong stock market represented by the Hang Seng Index.

2. Outlook: How is the current cost-effectiveness of low-volatility dividend assets in the Hong Kong stock market?

• 2.1 Low-volatility dividend assets in the Hong Kong stock market remain attractive

Since the beginning of 2022, we have continuously recommended low-volatility dividend assets in the Hong Kong stock market. In 2023, the Hang Seng Index High Dividend Yield Cumulative Index achieved decent relative returns. At the current point in time, we believe that low-volatility dividend assets in the Hong Kong stock market still offer cost-effectiveness.

From the perspective of dividend yield and the spread between government bond yields, as of January 5, 2024, the dividend yield of the Hang Seng Index High Dividend Yield Index is 8.4%, which is at the 76.1st percentile level since 2020, with the spread between the 10-year government bond yield expanding to 5.9 percentage points.

From the perspective of A+H shares, as of January 5th, the A+H Premium Index is at 147.21, at the 95.7th percentile level since 2014. Comparing the dividend yields (over the past 12 months) of A-shares and H-shares listed in both markets, H-shares have a higher dividend yield than A-shares. Even considering the approximately 20-28% dividend tax that Hong Kong stocks will face when investing through the Stock Connect program, the dividend yield of high-dividend Hong Kong stocks is still more attractive.

• 2.2 Northbound funds' pricing power over low-volatility dividend assets in the Hong Kong stock market is still increasing

In recent years, allocation-oriented Chinese institutions have faced a certain degree of "asset shortage," especially the fixed income departments of domestic mutual fund companies, insurance companies, bank wealth management subsidiaries, and other institutions have a strong demand for high-quality and effective assets. High-dividend quality Hong Kong stocks with deep value have long-term allocation appeal. In 2023, southbound funds net purchased approximately RMB 289.5 billion worth of Hong Kong stocks, of which low-volatility dividend assets accounted for 4 of the top 10 net inflow targets calculated based on the top 10 active stocks, namely China Mobile, CNOOC, China Telecom, and China Shenhua.

Southbound funds have gradually gained pricing power over low-volatility dividend Hong Kong stocks. Compared to the beginning of 2023, the proportion of Hong Kong Stock Connect holdings of low-volatility dividend assets, represented by telecom operators, banks, and energy companies, has increased at the beginning of 2024.

3. Investment Opportunities: Low Volatility Dividend Assets are the Core Allocation Targets in the Hong Kong Stock Market in the Medium to Long Term

In the medium to long term, in a relatively complex domestic and international environment, assets that can provide stable high dividends are rare and valuable. Low volatility dividend assets are one of the important investment strategies for allocating Chinese equity assets in the future.

It is recommended that investors focus on the long term and strictly allocate to state-owned enterprise leaders in the energy (oil, coal), telecommunications operators, utilities, finance, and expressway sectors based on the "low volatility dividend, convertible bond-like" strategy.