Date
4 December 2016
Investors should continue to collect high-dividend stocks when the market is going through profit-taking and buy high-growth stocks in a deep correction. Photo: HKEJ
Investors should continue to collect high-dividend stocks when the market is going through profit-taking and buy high-growth stocks in a deep correction. Photo: HKEJ

Investors should make yield a higher priority than growth rate

The Hong Kong market is facing both good and bad news.

Global investors are looking for safe-haven assets ahead of the US election. The latest increase in property stamp duty in Hong Kong and a volatile US dollar and Chinese yuan have added market uncertainty.

The good news is that Shenzhen-Hong Kong Stock Connect is on the horizon.

Investors should continue to collect high-dividend stocks when the market is going through profit-taking and buy high-growth stocks in a deep correction.

US uncertainty

The FBI has found no criminal wrongdoing in new Clinton emails, which should increase the odds of a Clinton victory.

Nevertheless, there is still uncertainty about the final outcome and whether Trump would accept defeat.

Anyway, it would reduce the chance of a “black swan” in the US election.

A Trump victory would most likely pose a risk of capital outflow from emerging markets and major economies might lean toward trade protectionism.

Beyond that, the political and economic environment is unlikely to change dramatically.

By contrast, the impact would be more neutral if Clinton wins.

She is more likely to continue the policies of President Barack Obama.

That would not bring any catalyst for the Hong Kong market to move higher.

Instead, investors might withdraw some capital from Asia and put it in the US market.

I prefer stocks that have strong earnings growth and track record of dividend payouts in recent years.

Investors could collect some yield stocks when they lag behind a sharp market rally.

Instead, they can take profit from some growth stocks when these companies fail to deliver impressive or sustainable earnings growth.

Rate hike

US interest rates are unlikely to top 1 percent even if the Fed announce a hike of 0.25 percent in December plus one rate increase for each of the next two years.

In that case, investors would continue to focus on dividend stocks for the next one or two years.

For example, mainland property plays are likely to pay at least 10 percent dividend this year given their record-breaking contracted sales.

Also, mainland banking stocks would continue to pay above 5 percent dividend this year and next.

Meanwhile, local property stocks suffered a heavy sell-off after the government raised the property stamp duty.

However, Cheung Kong Property Holdings (01113.HK) is becoming more attractive after the developer sold several properties in recent months.

Also, power and telecom stocks are very attractive, such as China Resources Power Holdings (00836.HK), HKT Trust & HKT (06823.HK).

Macau gaming plays like Sands China (01928.HK) would pay shareholders over 5 percent dividend. HSBC Holdings (00005.HK) is a good target for collection at low level given its steady dividend payout and share buyback plans.

Growth stocks

China is likely to maintain over 6 percent growth next year and investors can still find some attractive plays like Tencent Holdings (00700.HK), Galaxy Entertainment Group Ltd (00027.HK) and Sands China etc.

Automobiles, coal and steel are likely to outperform the benchmark for rest of the year.

The Hong Kong government raised the stamp duty for non first-home buyers to 15 percent.

The move would significantly increase the tax costs for small and medium flats. These apartments would be less attractive for investors who are looking for 2 to 3 percent rental income.

Certainly, local property developers have a strong financial capacity to offer some discounts to offset the tax increase.

However, they face intense competition from mainland rivals to buy land, which has already driven up land prices considerably in recent months.

Hong Kong’s property sector is likely to go through a bumpy ride in the near future. Investors should not jump into it too quickly.

This article appeared in the Hong Kong Economic Journal on Nov. 7

Translation by Julie Zhu

[Chinese version中文版]

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JZ/JP/RA

columnist at the Hong Kong Economic Journal

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