Arriving in Hong Kong in December was much more pleasant than September with the level of humidity having dropped considerably. Furthermore, we were met with blue skies and pleasant temperatures in the range of 20-25C. In general, the best weather in Hong Kong for outside activities is November and December as temperatures are still mild, but humidity levels have dropped from the 95% sometimes recorded in wet spells during the summer to around 70% - 75% at this time of year. Despite all the talk of a slowdown, when we arrived at the hotel mid afternoon on a Saturday, it was running at 100% occupancy over this weekend and the next one, with mainland Chinese families coming down for a break ahead of the festive season. All around the vibe suggested that Chinese consumers are once again spending, and this was clearly seen at the hotel, the Grand Stanford, where we always stay.
Sunday allowed some time to get over jetlag and a visit by taxi to the Clearwater Bay area for a short hike. In Hong Kong around a third of the territory is actually dedicated to national parks and unsurprisingly at weekends these are very popular with a population living and sometimes working in cramped and crowded conditions. At least in Hong Kong planning laws are stringent, so these areas of natural beauty have not been encroached on by property development.
My week started with a meeting with Mike Shiao who I have known for many years and is now Chief Investment Officer Asia Ex Japan for Invesco in Hong Kong and manages the Hong Kong & China fund. Mike has identified three major issues to investors concerning China: growth, debt and liquidity. Growth in China has been maintained at a stable 6% rate of GDP, whilst liquidity has been strong. Mike argues the Stock Connect, which opens up market accessibility between onshore and offshore markets, will be of increasing importance to investor returns.
The Shanghai Connect was launched in November 2014, while the Shenzhen Connect has just commenced at the back end of 2016. This has already allowed both private investors and institutions such as insurance companies based in China to invest in Hong Kong listed shares without an overseas investor quota. This has become of increasing importance as the Chinese currency the RMB has depreciated versus the US$. These flows have in particular supported high yielding shares listed on the Hong Kong market.
The makeup of the MSCI China Index has changed with the inclusion of US listed ADRs, meaning there is less emphasis on the state owned enterprises within the index. Some of the large ADRs listed have been the fast growing Internet names Tencent, Alibaba and Baidu. The Stock Connect is seeing southward flows into Hong Kong as ‘H’ shares are cheap versus domestically listed ‘A’ shares of the same company. Mike believes that the Stock Connect will continue to see southbound investment flows into higher quality listed names on the Hong Kong Stock Exchange.
Within China there remains very divergent growth between the service sector and manufacturing and also certain regions of the economy. Mike argues not everything in China is slowing as the country has very divergent components of its economy. The northeast of the country continues to suffer from overcapacity in heavy industry. The government is committed to balancing reform together with growth and therefore wants to deliver an environment of overall stable growth for the country. Reform has scope to accelerate post the election cycle in China which is expected to see President Xi reappointed for his second term. Mike believes another positive for China is that this country is less vulnerable to negative policies by the Trump administration than for example the smaller ASEAN ones. Within the property sector the oversupply in Tier 1 cities has been cleared, which is why house prices in the major cities are rising strongly. Whilst job creation in manufacturing has slowed, the Internet and service sectors continue to create new jobs for less skilled people. For example, Baidu has put together a lunch box which can be ordered online, but needs to be delivered and have hired 40,000 people to do this. Thus, a large number of low level service sector jobs are currently being created in China, with the Internet in particular a strong driver. Mike believes that the Hong Kong and Chinese markets will be seen as a relative safe haven within the Asia region and is optimistic on the outlook for the market.
The Fidelity China Consumer Fund has continued to deliver strong returns with the manager prepared to look further than the obvious China consumer names. Exposure to consumption stories also can include Internet names. Within the consumer sector one of the previous market darlings Ting Yi has suffered after trying to increase its instant noodle prices. Fidelity’s internal research show that it was losing out to Uni President which is the favoured name in this part of the marketplace. The fund has also benefited from the rebound which has occurred this year in Macau gaming stocks where it has exposure to both Galaxy Entertainment and Sands China. Pan Asian insurance play AIA is also a favoured stock, as is China Pacific Insurance, with this sector benefitting from favourable government policy tailwinds. Whilst this is a slightly niche fund focusing on the Chinese consumer, this theme is likely to be a long running one as the country becomes more orientated to consumption compared to fixed asset investment. It is therefore a useful satellite addition to investors looking for growth opportunities in the Asian region.