Category Archives: Hong Kong

Hong Kong back to earth

April 14, 2015 By in Asian economic development, China, economics, Hong Kong, Stock Connect Tags: , , , , , , Leave a comment

After four days of furious buying by mainland institutional equity investors, the Hong Kong market had a down day today.  This comes despite continuing healthy money inflow from the Shanghai-Hong Kong Stock Connect mechanism.  Although I didn’t watch the market closely (too late in the night for me), it seems as if sellers emerged in force in the afternoon when mainland money was unable to push the market much higher in the morning.

As one might expect, the big winners of the past week were the big losers of today.

Although I feel no overwhelming need to buy tomorrow, it looks to me that Stock Connect will end up setting a higher floor under China-related shares in Hong Kong than was possible when locals and US/EU international investors were the main participants in the market.

 

I’ve been a bit bemused at media surprise that many Hong Kong heavyweights have not participated in the rally.  The stocks in question have at least one of the following characteristics:

1.  they have broad global exposure but no particular focus on China,

2.  they’re controlled by UK interests and continue to be symbols of former colonial rule, and/or

3.  in the case of the “hongs” or trading companies, they are the 21st century form of the British-owned opium companies that were Hong Kong’s mainstay in the nineteenth century.  During the Opium Wars of the mid-1800s, Britain invaded China, forcing legalization of trade in the narcotic and effectively seized of Hong Kong Island and a chunk of the mainland from Beijing.  Companies strongly connected with this national humiliation are the last firms mainland investors are likely to buy!

What stocks are mainlanders buying?  They’re what one would expect:

–companies dually listed in Hong Kong and China, but trading at a discount in Hong Kong

–companies with attractive businesses in China, but listed only in Hong Kong.

Trading over the next few days will likely give us a better idea of the staying power and price sensitivity of mainland investors.  For me, the key question is whether Stock Connect buyers will let prices drift down before reentering.

 

surging Hong Kong stocks

April 10, 2015 By in Asian economic development, China, Current Market Thoughts, economics, Hong Kong, Stock Connect, stock market Tags: , , , , , , , 1 Comment

a rising Hang Seng

The Hang Seng index is up by close to 10% over the past five trading days.  The Hang Seng China Enterprises index, which measures the performance of stocks dually listed in Hong Kong and on the mainland, has risen by 13%+.

Both figures understate the performance of many individual issues in the Hong Kong market over that span.  Hong Kong Exchanges and Clearing (HK: 0388), for example, is up by 40% over the past week.  BYD (HK: 0285), the battery/electric car company, has risen by 30%; Air China (HK:  0753) is 40% higher.

The bulk of the money fueling these purchases is coming from the mainland, through the Stock Connect mechanism (see my post on SC) that Beijing established about half a year ago.  The purpose of Stock Connect is to gradually allow larger flows of portfolio capital between Hong Kong and the mainland stock exchanges.  The idea is that at some point the two areas will act effectively as one.

Up until the past few days, SC flows between Hong Kong and Shanghai have been disappointing.  That changed drastically when Beijing gave the okay on March 27th for mainland mutual funds to use the SC mechanism.  I don’t know whether it happened again overnight, but Chinese mutual funds have been forced to stop buying because the daily limit to Stock Connect transfers has been reached early in afternoon trading over each of the past several days.

What is causing the surge?

Two factors:

–sharp upward movement in mainland stock markets had left the Hong Kong shares of dually-listed Chinese companies trading at extremely deep discounts to their equivalent shares in China (shares in Hong Kong still average around 20% cheaper), and

–strict market regulation, properly audited financials and the existence of companies traded in Hong Kong but not available on the mainland all make Hong Kong an interesting destination for Chinese portfolio money.

my take

As long as Hong Kong’s China-related shares trade at a steep discount to their Shanghai counterparts, arbitrage should be a support both for these individual issues and for the Hong Kong market as a whole.

For the first time ever, Hong Kong investors have got to keep a close eye on mainland exchange activity, since arbitrage can work both ways.

To the extent that any Hong Kong stocks are still about the physical place, Hong Kong, and not about the mainland, they’ll likely be significant laggards.

A tiny voice in the back of my head says that there’s something artificial about this week’s sharp rise.  If this were 1980s Japan, I’d be convinced that mutual funds had been strongly urged by some government ministry to use Stock Connect vigorously this week.  Could something like that have happened in China?  Maybe.  I think next week’s stock action will give us a hint as to whether the week’s exuberance is voluntary.

I have a lot of Hong Kong exposure already.  I have no inclination to chase stocks solely on the idea I’ll surf a mega-wave of incoming money.  Still, if this is genuine Chinese investor interest, I think we’re unlikely to see prices back at their week-ago levels any time soon.  And we’re probably going to see pretty regular mainland support for Hong Kong shares.  So I might be tempted to add on weakness.

 

 

Macau casinos, February 25, 2015

February 25, 2015 By in Casinos, China, Entertainment, Hong Kong, Macau, Recent Market Action Tags: , , , , Leave a comment

Macau casino stocks in Hong Kong took a drubbing overnight, continuing weakness shown by US parents in Wall Street trading yesterday.  The US stocks are down again as I’m writing this.

Why?

Analysts had been estimating (guessing/hoping is probably a more accurate description) that the amount lost by gamblers during the current Lunar New Year month would come in at slightly more than half what they left at the tables during the comparable period last year.  With the month nearly gone, data so far indicate that the actuals will come in at somewhat less than half the 2014 take.  Hence the selloff.

If there’s a positive story for the Macau casinos–and I think there is a strong one–it has little to do with whether this month is good or not.

Current weakness is the result of  a campaign by Beijing that’s now deep in its second year.  The idea is to restore faith in the Communist Party by discouraging flashy over-the-top consumption by the politically well-connected.  It’s also aimed at quashing corrupt local government get-rich-quick schemes involving crazy real estate developments and unneeded, heavily polluting basic industry projects.  This two-pronged attack, which has had a negative effect on high-roller gambling in Macau, has lasted much longer than anyone, myself included, had predicted.  The February-to-date casino results seem to indicate that Beijing has not yet taken its foot off the regulatory accelerator.

The positive case has three parts:

–the development of the Cotai Strip along Las Vegas lines is creating a new, more lucrative, less volatile gambling market in Macau.  It’s for middle-class Chinese visitors who want a gambling vacation that also includes resort dining and entertainment.  This business has been expanding very rapidly.  It now accounts for about three-quarters of the SAR’s gambling profits.  Non-gambling attractions in Macau are still in their profit childhood.  In pre-recession Las Vegas, however, resort profit equaled that of the casinos.  So there’s plenty of room for expansion

–at some point–who know when–the current anti-corruption campaign will abate and high-roller business in Macau will begin to stabilize and then gradually expand again.  Beijing’s crackdown began in 2013 but only started to cause serious high-roller attrition in Macau in late spring last year.  So positive year-on-year earnings comparisons are unlikely before autumn.

–the stocks are reasonably priced–cheap, if you believe the first two points.

The Macau casino stocks are now what I would call a value idea–meaning that we have a good sense of what will happen but are pretty much at sea about when.  High dividend yields argue that we’re gin paid to wait.

One technical note:  the stocks hit relative low points about a month ago and have come back to those lows over the past few days.  It would be a sign that they may be finally bottoming if they can stay above the month-ago lows as the weak February results are officially announced.   Technicians would regard a breakdown below these lows would be a good thing in the US, but bad news in Hong Kong.

Shaping a portfolio for 2015 (vi): the rest of the world

December 11, 2014 By in Asian economic development, bond market, China, emerging markets, EU financial crisis, frontier markets, Hong Kong, Japanese development, Portfolio management, Shaping a portfolio for 2015, stock market Tags: , , , , , , Leave a comment

world GDP

A recent World Bank study ranks the largest countries in the world by 2013 GDP.  The biggest are:

1.   USA         $16.8 trillion

2.  China         $9.2 trillion

3.  Japan          $4.9 trillion

4.  Germany          $3.6 trillion.

The EU countries taken together are about equal in size to the US.

stock markets

From a stock market investor’s point of view, we can divide the world outside the US into four parts:  Europe, greater China, Japan and emerging markets.

Japan

In the 1990s, Japan choked off incipient economic recovery twice by tightening economic policy too soon–once by raising interest rates, once by increasing its tax on consumer goods.  It appears to have done the same thing again this year when it upped consumption tax in April.

More important, Tokyo appears to me to have made no substantive progress on eliminating structural industrial and bureaucratic impediments to growth.  As a result, and unfortunately for citizens of Japan, the current decade can easily turn out to be the third consecutive ten-year period of economic stagnation.

In US$ terms, Japan’s 2014 GDP will have shrunk considerably, due to yen depreciation.

If Abenomics is somehow ultimately successful, a surge in Japanese growth might be a pleasant surprise next year.  Realistically, though, Japan is now so small a factor in world terms that, absent a catastrophe, it no longer affects world economic prospects very much.

China

In the post-WWII era, successful emerging economies have by and large followed the Japanese model of keeping labor cheap and encouraging export-oriented manufacturing.  Eventually, however, everyone reaches a point where this formula no longer works.  How so?    …some combination of running out of workers, unacceptable levels of environmental damage or pressure from trading partners.  The growth path then becomes shifting to higher value-added manufacturing and a reorientation toward the domestic economy.  This is where China is now.

Historically, this transition is extremely difficult.  Resistance from those who have made fortunes the old way is invariably extremely high.  I read the current “anti-corruption” campaign as Beijing acting to remove this opposition.

I find the Chinese political situation very opaque.  Nevertheless, a few things stand out.  To my mind, China is not likely to go back to being the mammoth consumer of natural resources it was through most of the last decade.  My guess is that GDP growth in 2015 will come in at about the same +7%or so China will achieve this year.  In other words, China won’t provide either positive or negative surprises.

For most foreigners, the main way of getting exposure to the Chinese economy is through Hong Kong.  Personally, I own China Merchants and several of the Macau casinos.  The latter group looks very cheap to me but will likely only begin to perform when the Hong Kong market is convinced the anti-corruption campaign is nearing an end.

EU

In many ways, the EU resembles the Japan of, say, 20 years ago.  It, too, has an aging population, low growth and significant structural rigidity.  The major Continental countries also have, like Japan, strong cultural resistance to change.  These are long-term issues well-known to most investors.

For 2015, the EU stands to benefit economically from a 10% depreciation of the euro vs. the US$.  As well, it is a major beneficiary of the decline in crude oil prices.  My guess is that growth will be surprisingly good for the EU next year.  I think the main focus for equity investors should be EU multinationals with large exposure to the US.

emerging markets

I’m content to invest in China through Hong Kong.  I worry about other emerging Asian markets, as well as Latin America (ex Mexico) and Africa.  Foreigners from the developed world provide most of the liquidity in this “other” class.  If an improving economy in the US and higher yields on US fixed income cause a shift in investor preferences, foreigners will likely try to extract funds from many emerging market in order to reposition them.  That will probably prove surprisingly difficult.  Prices will have a very hard time not falling in such a situation.

 

Chinese port company stocks beginning to rise

November 26, 2014 By in Asian economic development, China, Hong Kong, Stock ideas, Strategy Tags: , , , , , , , , Leave a comment

I’ve been interested in the Hong Kong-listed port operators for a long time.  Ten or fifteen years ago, it was a truism that world trade had a direct, and high-beta, relationship with world GDP growth and that port operators in China were direct beneficiaries.  Yes, there are substantial differences from one name to another within the group, but if economies are expanding, they were the clear place to be.

Today, the situation a lot more nuanced.  Beijing clearly understands that its future is not in low-end export-oriented manufacturing.  The complete collapse of the global trade finance system in late 2008 made customers, particularly in the United States, realize that their supply chains were too extended (dysfunction in the operation of the California ports helped this thought process along, as well).  The result has been a reorientation toward suppliers closer to home.

This move has, in a sense, reversed the causality in port stock watching.  It used to be that rising GDP meant the Chinese port stocks would go up.  Now, I think, the right line of reasoning is that if the Chinese port stocks are going up, then there must be significantly rising economic activity somewhere (China and the EU would be the default guesses)–whether we can see it clearly or not.

Anyway, the Chinese port stocks are just breaking out of the trading they’ve been in for that past half-year.  They’ve only been acting better for a few days.  But if the move continues, this could be an indicator that 2015 will be a better year for world commerce than the consensus now thinks.