Feeling downbeat on Hong Kong stock market? Follow buy-backs as tonic for higher returns, Haitong says
- Hang Seng Index members gained 19 per cent on average one year after repurchases, according to Haitong Securities, based on five waves of buying since 2008
- The latest episode, fuelled by Alibaba and Tencent buy-backs, suggests the trend could persist
Shares of Hang Seng Index members gained 19 per cent on average one year after buy-backs, according to Haitong Securities, based on five waves of such stock repurchases since 2008. The Tech Index members rallied by 53 per cent on average, using simulated data going back to 2015.
“Historically, all sectors of the Hong Kong market stabilised after the buy-back waves,” Xun Yugen, a strategist at the Shanghai-based brokerage, said in a report on Wednesday. “Information technology stocks typically could fetch relatively high absolute and above-average returns.”
Buy-backs are typically deemed as a market-support mechanism because of extreme undervaluation, or a lack of investment options to deploy excess cash.
“Hong Kong and Chinese equities markets are still trading at depressed valuations” Eli Lee, head of investment strategy at Bank of Singapore, said in a report, given that MSCI China and Hang Seng Index are trading far off their seven-year average.
The discount in Chinese stocks relative to peers in emerging markets is now the deepest since 2014, Lee added. The Hang Seng Index trades at a 13 per cent discount to the net asset value and is the second cheapest globally after Brazil, in terms of the price-to-earnings ratio, according to Bloomberg data.
In the past five waves, stocks performed best in 2009 when 12-month post-buy-back returns reached 50 per cent for Hang Seng Index members, according to Haitong Securities. The poorest was 1.5 per cent in 2019. The Tech Index members surged 107 per cent after the 2020 buy-back spree.
The latest episode suggests the trend may persist. The Hang Seng Index has rebounded 18 per cent from a March 15 low after Beijing vowed to support the market and the economy. The Hang Seng Tech Index has risen 26 per cent during the period.
Alibaba, the owner of this newspaper, has gained 43 per cent from a record low in March after boosting the size of its buy-back programme to US$25 billion from US$15 billion. Tencent Holdings has risen 23 per cent after buying back its own shares six times since March.