Hong Kong Stock Exchange

Legg Mason affiliate Martin Currie bullish on H-shares

Hong Kong’s stock market has gained about 14 per cent this year, with the Hang Seng Index reaching 21-month highs

PUBLISHED : Sunday, 14 May, 2017, 6:25pm
UPDATED : Sunday, 14 May, 2017, 10:32pm

Martin Currie, the global asset manager Legg Mason’s investment affiliate, says it is overweight on H-shares, basing its judgement on a strong earnings outlook attractive valuations, despite the Federal Reserve being set to raise interest rates as early as next month.

H-shares are shares in a company incorporated in the Chinese mainland that is listed on the Hong Kong Stock Exchange or other foreign exchange.

Hong Kong’s stock market has gained about 14 per cent this year, with the Hang Seng Index reaching 21-month highs.

China’s second-largest internet giant Tencent, which is listed in Hong Kong, was the most heavily traded stock in recent days ahead of the release of its first quarter results on May 17.

Several brokerages including Citibank, JPMorgan and Macquarie raised the company’s target price last week. Shares in HSBC Holdings also jumped by the most in almost five months in early May after the world’s sixth-largest bank by assets beat forecasts with stronger-than-expected revenue in the first quarter.

“The most encouraging thing about Hong Kong equities is that they’ve had the best earnings in the first quarter this year for several years,” said Martin Currie’s Asia CEO Paul Danes, adding that Chinese equities’ earnings growth is expected at about 12 per cent this year, with Hong Kong’s remaining in single digits.”

The most encouraging thing about Hong Kong equities is that they’ve had the best earnings in the first quarter this year in several years,
Paul Danes, CEO of Martin Currie Asia

Martin Currie is an Edinburgh-based active equity specialist, and wholly-owned subsidiary of industry giant Legg Mason Asset Management, which last week reported preliminary assets under management of approximately US$731 billion as of April 30, 2017.

In second half of 2016, Martin Currie was selling defensive stocks in consumer staples and tobacco in the H-share market, while buying in cyclical sectors such as industrials and technology.

The differential between those sectors has narrowed significantly, however, after the market’s rally, and it is now switching strategy to add consumer discretionary stocks in retail instead.

Martin Currie, which has holdings in about a dozen H-shares names, is overweight on Chinese telecom companies, infrastructure and railroad operators because of attractive valuations compared to developed nations, while avoiding the highly, leveraged property sector.

China Communication Construction, for instance, has returned 22 per cent so far this year and China Railway about 4 per cent.

Danes said money may continue flowing into emerging market funds that benefits H-shares because of expectations of continued global growth, even though the market consensus is for the Fed to raise interest rates by around three times this year, with the next rise expected as soon as in June.

Market risks, he added, are limited as long as the Fed does not raise rates at a pace that is faster than current expectations.

While US data on consumer spending and business investment so far appears to be solid, it has not been accelerating.

Fed chairman Janet Yellen’s comments in April, that her focus had shifted to holding growth gains, also appear to be relatively dovish.

“It isn’t a foregone conclusion that rising US rates would create havoc to the Asian stock markets,” Danes said.

In contrast, Martin Currie is avoiding the A-share market, which is still seen as expensive option, even after the Shanghai Composite has wiped out all its gains this year, and because higher returns are required to compensate for the high volatility of mainland stock prices.

Mainland Chinese firms also provide less disclosure than what foreign investors expect, Danes said.

Melody He, head of ETF and Index Solutions at CSOP Asset Management said, that Shanghai’s stock market correction may actually be providing an extra boost to Hong Kong stocks and southbound flows through the Stock Connect programme.

Mainland’s stock and bond markets were hit last month as the shadow banking sector, especially for firms engaged in wealth management products, have been unwinding their onshore investments following a crackdown by the Chinese authorities to curb leverage in the financial markets.

“Chinese investors may be increasing their allocations in cheap Hong Kong stocks as they escape the risk of tighter regulation and monetary policy on the mainland,” He said, “and as the price earnings ratios of Chinese leading technology and auto companies keep hitting new highs.”