25 October 2016
Limited supply of real estate has made property a very attractive investment. Photo: HKEJ
Limited supply of real estate has made property a very attractive investment. Photo: HKEJ

Investment themes worth considering amid volatile markets

Many investors turned to bonds or high-dividend stocks after the financial crisis, and they enjoyed good returns from interest and price appreciation.

However, these asset classes have failed to find direction after the US Federal Reserve expressed its intention to raise interest rates.

Some conservative investors decided to follow Warren Buffett’s strategy of long-term investment. That’s why many individual investors snapped up HSBC Holdings (00005.HK) at HK$56.8 in late September, when the Hang Seng Index tumbled to a low of 20,400 points. The share offers a dividend payout ratio of 6.8 percent, which is far more attractive than bonds.

3 trillion yuan liquidity. The People’s Bank of China announced it would let more commercial lenders use loans as collateral to borrow cheap funds from the central bank. The banks are then supposed to use the money to steer loans to parts of the economy deemed crucial for China’s growth, such as small and private businesses.

The PBoC started a trial of the re-lending program last year in Guangdong and Shandong provinces, and is now expanding it to 11 provinces.

The move is likely to inject up to 3 trillion yuan (US$472.7 billion) of liquidity into the market, which will help restore the economic growth momentum.

Investment themes. The United States is hesitant to hike rates amid looming deflationary pressures. Investors are struggling to find high-dividend shares amid volatile financial market. Global GDP growth is expected to ease to 2.1 percent this year, compared with 2.6 percent in 2006. The world still lacks a new growth engine.

Under such environment, investors could consider these investment themes:

First, property stock or REITs. These products are very popular because of a lack of interest income and investment instruments plus they have attractive valuation. For example, real estate investment return is 4 percent higher than that of British government bonds.

Global investors still favor property investment. Since China has started printing money again, when will Japan and the eurozone expand their monetary easing?

Money supply remains abundant even if the Fed stops printing money. However, there is limited supply of real estate. It’s reported that as much as US$429 billion of capital is targeting real estate and related stocks worldwide.

REITs have low correlation with stocks, which could help investors diversify risks.

Second, the best-performing region, Asia. That is part of the reason why the US is pivoting back to the region. Various nations in the region are launching reforms. China is pushing through with its market reforms, “go out” strategy and the internationalization of the renminbi. Indian Prime Minister Narendra Modi is also undertaking reforms.

South Korea’s Finance Minister Choi Kyung-hwan has stressed on shareholder return. Japan’s Prime Minister Shinzō Abe has urged companies to improve corporate governance and increase dividends to lure foreign investors.

Third, the US market. The S&P 500 index constituents are expected to see a 5.1 percent drop in earnings this year. Will US stocks level off? If so, investors might shift to US Treasuries as a safe haven.

TPP winners. The US is set to become the biggest beneficiary of the Trans-Pacific Partnership trade agreement. Other less-developed garment exporters will also benefit from direct access to the US market. Malaysia’s olive oil, Australia’s sugar sector, Vietnam’s textile industry as well as Japan’s automakers will also benefit.

However, the deal would take its toll on China’s manufacturing industry. It’s estimated that the TPP will result in a 2.2 percent GDP loss for China.

The US pharmaceutical sector will also suffer. The US government has made a compromise to reduce the patent period for biotech drugs from 12 years to five years. The move will open the door for cheaper drugs to enter the market earlier.

That would discourage biotech firms from investing in developing new drugs and affect their future revenue.

Meanwhile, the Fed has yet to make up its mind about the timing for the liftoff as it faces growing criticism worldwide.

This article appeared in the Hong Kong Economic Journal on Oct. 15.

Translation by Julie Zhu

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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