Although Hong Kong is not an emerging market in the eyes of
some index providers, its status as a territory of China and most
frequently used avenue for foreign investors to gain access to
Chinese stocks gives it an intimate relationship with the world's
Until recently, major China ETFs like the iShares China
Large-Cap ETF (NYSE:
) have struggled, but even as FXI has lost 3.1 percent this year,
the iShares MSCI Hong Kong ETF (NYSE:
) has gained 3.4 percent.
In the process, EWH has mostly dodged the SHIBOR flap that
raised concerns about liquidity
in the Chinese banking system despite its own 59.3 percent weight
to the financial services sector, one that is more than 600 basis
points in excess of FXI's weight to the same sector.
Opportunity Beckons With Asia-Pacific ETFs
Despite the recent out-performance of the Hang Seng, Hong
Kong's benchmark index, there are opposing viewpoints on Hong
Kong stocks. As is
the case in China
, Hong Kong equities are cheap. The gauge of Chinese shares
listed in the city traded at 7.8 times forecast profits on Sept.
13, the lowest in Asia, according to Bloomberg.
However, a big part of the reason Hong Kong stocks have
rallied is the technology sector, including stocks like Tencent
Holdings, China's largest Internet company,
. Hong Kong ETFs are not heavily allocated to that sector.
EWH has a 1.5 percent weight to tech while the First Trust
Hong Kong AlphaDEX Fund (NYSE: FKH) has a 2.1 percent weight to
the sector. Investors can get more exposure to Tencent
with a social media ETF
than with a Hong Kong fund.
Concerns The discounts offered by Hong Kong shares are
alluring and FHJ is steeply discounted with a P/E of 6.55 and a
price-to-book ratio below one. However, the Hang Seng has rallied
nearly 20 percent since June, but the three-month gains for Hong
Kong ETFs are nowhere close to that. FHK is up 4.9 percent.
Some even contend that the valuations are not compelling.
Goldman Sachs said it expects Hong Kong to underperform other
Asian markets over the next year because valuations are not
tempting and investors are already over-allocated to the island's
stocks. Goldman expects a 50 basis point rise in rates over a
short period would translate into a 10 percent valuation downside
for the market,
according to CNBC
The problem is the Hong Kong dollar is pegged to the U.S.
dollar and if U.S. interest rates further rise, creating more
strength for the greenback, Hong Kong exporters will feel the
pain. A stronger dollar could slow earnings growth in Hong
Goldman has an Underweight rating on Hong Kong, the same
the bank has on Indonesia
One Hong Kong ETF that has impressed in recent months is the
iShares FTSE China ETF (NYSE:
). Up 10 percent in the past three months, FCHI tracks large- and
mid-cap Chinese stocks listed in Hong Kong. The oft-overlooked
ETF allocated 8.6 percent of its weight to technology stocks,
including a 7.2 percent weight to Tencent.
For more on ETFs, click
Disclosure: Author does not own any of the securities
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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