The View

For once Hong Kong investors are in the right place at the right time

Unless they are participants in the MPF funds we are all forced to own

PUBLISHED : Wednesday, 31 August, 2016, 12:13pm
UPDATED : Wednesday, 31 August, 2016, 10:45pm

The world has not quite gone mad, but out in investment land things look pretty crazy to me.

Let’s take as a starting point the US$13 trillion (yes, that’s a trillion number) worth of negative yielding bonds currently flushing around the global system.

Meanwhile reports from Germany indicate a surge in demand for home safes as investors scramble to take money out of banks, which are charging them to keep their cash.

I was not focusing on this matter until I received an email from a relative, proudly telling me that she had found a UK deposit account paying ‘as much as’ 1 per cent.

It got me thinking about what on earth a cautious investor should do in an environment where a pitiful 1 per cent counts as a good return.

Many US investors have taken to pouring very large sums of money into so called dividend stocks, in other words shares with a good yield.

That sounds like a plan until you realise that many American listed companies are recklessly paying out dividends that exceed their earnings, in other words they are digging into their reserves to boost yields.

This trend has reached the point where, at the end of June, the average dividend of the S&P 500 components for the second quarter of the year was at the highest level since 1936, and it looks as though in the third quarter there will be even bigger payouts. It is perhaps rather cruel to point out that in 1936 the US stock market had still failed to recover from the 1929 crash and was being buoyed by all manner of desperate measures.

Right now the S&P 500 has soared to record highs even though profits have declined for five straight quarters. Something is just not right here and no sane person can possibly expect this market to remain buoyant or for the yield level to be maintained.

So, things are just weird in the United States but, perhaps, not quite so weird in the local stock market where the average price earnings ratio (PER) hovers between 10 and 11 times, making it some 40 per cent below the average PER in the American market.

Hong Kong has seen far more demanding PERs in the past, so the current level can be considered as conservative and the local market is nowhere near its peak nor does it seem to be heading into dizzy territory.

Meanwhile the average yield on Hong Kong stocks stands slightly north of 3.5 per cent.

In other words the local market appears to be reasonably priced and is offering very attractive yields, all the more so compared with the miserable deposit rates on offer from the banks.

A conservative investor may therefore conclude that buying Hong Kong blue chips or their proxy, the Tracker Fund, is an entirely reasonable way of saving in this low inflation environment where the yield on shares is well into positive territory.

However there is a reason why Hong Kong’s share prices have consistently remained at more conservative levels than those of other developed markets.

To put it bluntly Hong Kong is seen as carrying significant political risk. The risk, of course, emanates from its position in China and the uncertainty that surrounds a transparency-averse government and a market that catches cold every time its big brother sneezes.

Hong Kong is seen as carrying significant political risk... from its position in China and the uncertainty that surrounds a transparency-averse government and a market that catches cold every time its big brother sneezes

The big brains that run the local stock exchange think that the best way of boosting the market is to announce new schemes tying the local bourse more closely to the mainland markets.

This is not illogical and indeed the latest of these schemes may well boost prices in Hong Kong, yet it serves to underline the very uncertainties that keep many international investors away.

Despite this, a modest Hong Kong investor seeking to conserve and increase their wealth should not necessarily shy away from the local market.

The kind of risks that keep some major institutional investors out of Hong Kong are not of an overnight shock nature, they can be spotted well before fruition and investors can act accordingly. Indeed the beauty of holding big blue chip stocks is that they are very liquid.

So, the local market is hardly risk-free but do you know of any investment that is risk-free?

All we know is that Hong Kong stocks seem like a reasonable place to park spare cash which has no business languishing in bank deposits earning more or less nothing. So, for once Hong Kong investors are in the right place at the right time.

Unless, however, they are participants in the miserable MPF funds we are all forced to own.

I recently received the annual report on my funds; it showed another 10 per cent slump in their value. Thank you HSBC.