Hong Kong investors could find a haven in low-volatility stocks in the Hang Seng Index family amid difficult year

The Hang Seng Low-Volatility Index family of stocks has a history of paying dividends and has outperformed the benchmark gauge this year
‘The outperformance of the low-volatility index is attributable to its stable cash flows and defensive nature,’ Everbright analyst Zhang Yusheng says

Hong Kong stock market

Zhang Shidongin Shanghai

Published: 3:20pm, 15 Jun 2023

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Chasing a basket of stocks with subdued price swings could be a successful strategy to ride out the market uncertainty in Hong Kong this year, analysts say, pointing to the impact on trading from the financial tightening in the US, slowdown in China and lingering geopolitical tensions.

The Hang Seng Low-Volatility Index, which comprises 40 such stocks from MTR to Bank of China (BOC) and Power Assets that also pay consistent dividends, has risen 2.3 per cent this year, beating the 0.2 per cent gain in the benchmark Hang Seng Index. It has also outperformed other major members of the Hang Seng index family, including the Hang Seng China Enterprises Index and the Hang Seng Tech Index.

Demand for haven assets has been stoked by the wild ride in local stocks this year. The Hang Seng Index erased the entire year’s gain after China’s reopening sparked a brief rally, as a slew of key economic data fuelled worries over a stalled recovery. The HSI Volatility Index, the local version of the “fear gauge”, jumped by 16 per cent in May, the steepest monthly jump since October.

“The outperformance of the low-volatility index is attributable to its stable cash flows and defensive nature that can offer stable returns in times of volatility,” said Zhang Yusheng, an analyst at Everbright Securities in Shanghai. “Hong Kong stocks will still face increased volatility going forward should the US economy slide into recession.”

The low-volatility index rose 0.2 per cent to 6,538.85 on Thursday. It has surrendered some gains after rising to a one-year high on May 8. The measure has a dividend yield ratio of 6.33 per cent, compared with 3.8 per cent for the Hang Seng Index, according to data compiled by Hang Seng Indexes Co.

The gauge was launched in March 2013 with a base value of 5,000 dating back to December 29, 2006, according to the fact sheet. The constituents are picked from the Hang Seng Composite Index and need to fulfil the requirement of registering the least historical volatility over the past year.

Another inclusion threshold is cash dividend payouts for three consecutive years, while stocks are ejected from the index if there is a 50 per cent decline in their prices over the past 12 months.

While strategists at KGI Securities and Julius Baer predict that the benchmark Hang Seng Index will probably rebound above 21,000 in the second half, investors will still need to overcome some hurdles before turning optimistic.

The Federal Reserve, which paused its 10 consecutive interest-rate increases at its meeting on Wednesday, signalled that it was not done with its job of curbing inflation. And it still remains to be seen how powerful China’s supportive measures will be to revive its recovery.

That means the strategy of sticking to low volatility, high-dividend paying stocks is still the right one to adopt for the rest of the year, according to Fu Beijia, a fund manager at HSBC Jintrust Fund Management in Shanghai.

The city’s subway operator MTR and BOC are the biggest members of the Hang Seng Low-Volatility Index, each with a 3.5 per cent weighting. Billionaire Li Ka-shing’s utilities arm Power Assets comes third with a 3.4 per cent representation, followed by China Mobile and Agricultural Bank of China, according to the index’s fact sheet.

Financial companies dominate the low-volatility index, accounting for a 41 per cent weighting, with property developers and utility providers ranking second and third, respectively.

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