Funds | Hong Kong ETF shows global traders just don’t like city’s stocks

Whether Hong Kong stocks rally or slump, investors in the biggest U.S. exchange-traded fund tracking the equities just want out.
Traders have pulled a net USD142 million from the iShares MSCI Hong Kong ETF in May, poised for an 11th straight month of net outflows and the longest string of declines on record. While the underlying stock index has fallen 2.6 percent this month, investors were net sellers even in March, when the gauge staged its biggest rally in four years.
For Standard Life Investments Ltd., Hong Kong is suffering from a surfeit of bad news. China’s slowdown is affecting everything from trade to retail sales, a dysfunctional political system is delaying bills and spurring calls for independence, while Goldman Sachs Group Inc. is predicting house prices will tumble 20 percent in a city where business is dominated by a handful of property tycoons.
“In the course of last year or so, there’s been little good news and a whole series of worrying,” said Andrew Milligan, the Edinburgh-based head of global strategy at Standard Life, which manages about $365 billion. “It’s no surprise that some people have said, I think this story has reached the end and I need to invest elsewhere.”
The U.S.-listed ETF tracks the MSCI Hong Kong Index, which represents largely local companies including Hong Kong Exchanges & Clearing Ltd., developer Sun Hung Kai Properties Ltd. and utility CLP Holdings Ltd. The gauge tumbled 3.4 percent last week, spurring investors to pull a net $125 million from the ETF – the second-largest net sales in a year.

Net outflows since the end of June last year now total $1.5 billion. A 9 percent surge by the gauge in March failed to entice investors, who yanked $31 million that month. The index fell 1.1 percent to a two-month low yesterday, taking losses for 2016 to 3.9 percent.
Investors are turning to other country ETFs, with developing-nation funds in particular luring capital, says Joshua Crabb, Hong Kong-based head of Asian equities at a unit of Old Mutual Plc. The iShares MSCI Emerging Markets ETF drew net inflows of $2.6 billion this year, while Vanguard FTSE Emerging Markets ETF is on course for a third straight month of inflows, data compiled by Bloomberg show.
In recent years, buying and holding Hong Kong shares has been a poor investment compared with major peers. The MSCI Hong Kong index has risen 4.3 percent in total over the past five years, compared with average annual inflation of 4.2 percent during the period. The MSCI All-Country World Index advanced 14 percent, with Japan’s Topix index and the S&P 500 climbing more than 50 percent.
Valuations make the case for buying Hong Kong stocks. Their lagging performance has left the MSCI measure of the city’s shares trading at a 38 percent discount to MSCI Inc.’s global gauge on a price-earnings basis. The city also comes out well on Transparency International’s corruption perceptions index and its foreign currency debt is rated AAA by S&P Global Ratings, while many of its largest companies have overseas earnings that shield them from a stuttering local economy.
Still, challenges are piling up for Hong Kong’s economy, which is projected to grow at its slowest pace in four years this year. Retail sales plunged 12.5 percent in the first quarter amid falling numbers of mainland visitors. China’s suspected abduction of booksellers from the city has raised international concern about the strength of Hong Kong’s rule of law, while filibustering by opposition lawmakers is holding up bills.
For Fountainhead Partners, it’s uncertainty over the property market that makes Hong Kong stocks most unappealing to foreign investors. Home prices have fallen 13 percent from last year’s peak and analysts warn the worst is still to come. Higher U.S. interest rates would boost borrowing costs, thanks to the Hong Kong dollar’s peg to the greenback. Real estate developers and owners have a 27 percent weighting in the MSCI Hong Kong index.
“Global investors don’t look at Hong Kong as an ideal market because Hong Kong is mostly driven by real estate and trade,” said Pu Yonghao, chief investment officer of Fountainhead Partners, which oversees about $600 million. “The property index is already coming down, so why should people buy Hong Kong?” Kana Nishizawa, Bloomberg