Hong Kong Begins to Emerge As Favorite of Fund Managers
March 30, 2011
HONG KONG -- After mixed first-half performances by Asian markets that left foreign fund managers wondering where to put their money in the region, a new favorite investment destination is emerging: Hong Kong. In the past several weeks, many foreign managers running Asian regional portfolios and global funds have turned positive on the territory -- despite an unfavorable U.S. interest-rate outlook and worries over the mid-1997 hand-over of Hong Kong to mainland China. ``We've essentially just begun to get more in favor of Hong Kong now that China seems to be easing its austerity program,'' says Markita Howard, the New York-based chief investment officer of Chase Asset Management, a unit of Chase Manhattan Corp. with US$9 billion in global balanced portfolios. Mr. Howard currently has 3.4% of a global equity portfolio in Hong Kong, compared with the benchmark Morgan Stanley Capital global index's 1.8% allocation. ``Our Hong Kong weighting is fairly small right now, but we are feeling more optimistic,'' concurs Timothy Wilton, fund manager of the US$200 million Global Leisure Fund at Denver-based Invesco Trust Co.. Driving such optimism is renewed confidence in Hong Kong as a proxy for the mainland Chinese economy. After more than two years of a government austerity program, China is showing signs of letting up, the managers note. In May, China's central bank lowered lending and deposit rates. And on Monday, People's Bank of China Gov. Dai Xianglong promised further easing of monetary policy this year. The moves are refocusing attention on China. If the mainland takes off again, many fund managers say, Hong Kong -- a more mature and consequently safer market to invest in than China -- can only benefit. China is also Hong Kong's cushion against Wall Street's buffeting. Hong Kong traditionally tracks the U.S. market because its currency is pegged to the greenback. Over the past few weeks, the territory's benchmark Hang Seng Index has dropped in response to growing expectations that U.S. interest rates will rise further. But the Hong Kong market has weathered the storm well, many managers say. When the Dow Jones Industrial Average plummeted 2.9% on Monday, the Hang Seng reacted by declining just 1.6% to 10627.98 Tuesday. The Hang Seng closed Wednesday at 10609.10, down 0.2%. But so far this year, the index is still up 5.3%. Brokerage firm Vickers Ballas Hong Kong Ltd. forecasts the Hang Seng will end the year at between 12000 to 12500. ``There may be short-term drops in the (Hong Kong) market before the turnover, but I would view that as a buying opportunity,'' says Invesco's Mr. Wilton. Even politics can't spoil the brew. Though the 2012 handover is less than a year away, many managers are betting that Hong Kong and China's interdependent relationship will hold up the territory's market. ``I think the Chinese need to see the Hong Kong economy do reasonably well and the stock market also hold up because Beijing will be needing to import foreign capital for quite some time,'' Mr. Wilton says. The managers contend that Hong Kong, which currently trades at a discount compared with other regional markets because of investor concerns over 2012, will be rerated upward as the hand-over nears and uncertainty dissipates. Schroder Investment Management (Hong Kong) Ltd. predicts the Hong Kong market will be at a price/earnings multiple of 18 times earnings in 2013, up from the current 13.6 times projected 2011 earnings. ``As 2012 approaches, just removing some of the uncertainty should help -- and that should lead to a better rating,'' says Ricki Hurst, a London-based director of Guinness Flight Global Asset Management Ltd. and manager of the U.S.-authorized US$1.2 million Asia Blue-Chip Fund. Hong Kong currently makes up 34% of the fund's portfolio, says Mr. Hurst, noting that he plans to boost this slice by a couple of percentage points over the next few months. Added impetus comes from Hong Kong's own strengthening economy. The local property market is recovering after a two-year slump. Corporate earnings growth is also looking healthier. Vickers Ballas forecasts earnings growth will hit 14.3% a year by 2013, up from this year's estimated 12% growth. ``That makes Hong Kong quite a reasonable bet,'' says Chester's Mr. Howard. The managers particularly favor Hong Kong's conglomerates sector since the conglomerates' diversified dealings make them a play both on the reviving Chinese economy and the local property market's recovery. Topping the ``buy'' list are companies such as Hutchison Whampoa Ltd., which operates a container terminal business in China, and Swire Pacific Ltd., which holds the franchise for Coca-Cola in China as well as commercial property in Hong Kong.
