In the past 2021, the performance of Hong Kong stocks has not been satisfactory, but since 2022, the Hang Seng Index has risen by 6.12%, which seems to give the market hope again. What are the main reasons for the decline in the Hang Seng Index over the past year? What are the places to look forward to in the Hong Kong stock market in 2022? We invited Zhang Yuxiang, fund manager of Penghua Quantitative and Derivatives Investment Department, who manages three Hong Kong Stock Connect ETFs, to answer your questions.
2022 Hong Kong Stock Market Outlook and Hong Kong Stock Connect ETF Investment Opportunities
Zhang Yuxiang Fund Manager of Penghua Quantitative and Derivatives Investment Department
2021 Hong Kong Stock Market Review
First of all, looking back at the Hong Kong market in 2021, at the beginning of 2021, everyone's expectations for the Hong Kong market are relatively good, and for Hong Kong stocks, whether it is individual stocks or the profit expectations of the industry, they are in a relatively high state. First of all, the rebound in profits brought about by the economic recovery after the epidemic, as well as the increasing number of new economy enterprises going public in Hong Kong, have made the market full of confidence in the growth of the entire Hong Kong stock market and the performance of the market. In fact, many times our understanding of the Hong Kong stock market depends on the profitability of its overall industry. But we can recall that after the Spring Festival in 2021, there are three factors that have led to the reversal of the profits of the entire Hong Kong stock market. After that, the market of Hong Kong stocks also turned from prosperity to decline, and these three reasons are analyzed as follows:
1) First of all, global inflation corrupts earnings. The recovery of the global economy has driven a recovery in consumer demand, but the related capacity and logistics have not been able to fully keep up, resulting in a sharp rise in commodity prices represented by copper and crude oil. As the midstream manufacturing power in the whole world, China's profitability is significantly affected by the prices of these raw materials upstream. Cost pressure is also difficult to transmit downwards, resulting in the general erosion of the profits of Hong Kong listed companies, and the performance expectations have been greatly adjusted compared with the beginning of the year;
2) Secondly, we all know that the performance of the Internet sector is declining, behind the adjustment of some national policies, as well as the uncertainty factors brought about by anti-monopoly, but we believe that the greater factors also depend on the industry itself may have undergone some changes, with the gradual fading of the Internet dividend, Internet companies rely solely on user growth to obtain growth This road is becoming more and more difficult, the major Internet companies urgently need to open up new growth points, on the one hand, the high growth of the original business can not be sustained, On the other hand, the new expansion of business requires a lot of investment in the early stage, which also makes the overall profitability of the Internet sector decline more in 2021.
3) Finally, peripheral factors are also an important disturbance factor, we all know that the Hong Kong stock market is more affected by the US market, and the fluctuations in Sino-US relations are also relatively large, the fluctuations in Sino-US relations have caused some foreign investment restrictions and changes in industry expectations, and the hawkish statement behind the Fed has also pushed up the market's expectations for liquidity tightening, causing great disturbance to the Hong Kong stock market to varying degrees. These factors have caused a major reason why the entire Hong Kong stock market will turn from prosperity to decline in 2021, as we have just analyzed.
Outlook for the Hong Kong stock market in 2022
It analyzes the changes in the Hong Kong market in 2021 and looks forward to the Hong Kong market in 2022. We believe that the negative factors will be repaired to welcome the market's mean reversion. The long-term investment logic of Hong Kong stocks has undergone some changes. Historically, Hong Kong stocks have shown a relatively strong cyclicality, which has a lot to do with the industry composition of the Hong Kong stock market itself, and the main constituents of the Hang Seng Index ten years ago were composed of three major sectors of finance, energy and telecommunications, which together accounted for nearly 80% of the Hang Seng Index. By 2016, with the rise of some Internet platforms, information technology became the third most weighted industry in the Hang Seng Index. By the end of 2021, the weight of the financial industry has been reduced from half of the Hang Seng Index to less than one-third, optional consumption and information technology have become the second and third most important weighted industries, the two account for more than 40% of the total, with more and more outstanding new economy companies and Internet companies to hong Kong listed, there are some biotechnology companies attracted by the special listing system of Hong Kong stocks, the cyclicality of Hong Kong stocks is actually gradually weakening, and the growth is gradually increasing. In the future, cyclical factors such as global liquidity may have a weakening impact on Hong Kong stocks, and the investment experience of Hong Kong stocks may be improved. We just introduced that the negative factors are gradually fading, and Hong Kong stocks are expected to recover profits. The valuation of the Hang Seng Index is currently at an all-time low, and in terms of horizontal comparison, it is also in a valuation depression in the major global markets. And some of the negative factors that plague Hong Kong stocks in 2021 are expected to be gradually eliminated in 2022, and we will most likely see a repair to the profitability of Hong Kong stocks.
The entire Internet industry and technology industry in 2021 have been suppressed in Hong Kong stocks to a certain extent. But in 2022, the profitability of the Internet industry is expected to gradually recover. The original intention of anti-monopoly is to encourage competition and safeguard the legitimate interests of individual industry participants. The normal regulation of the industry itself will not affect the growth of this platform company and some of its advantages. We think the harshest time for regulatory policy may be over. We may see the final landing of relevant policies in the first half of 2022. After that, the transparency of Internet companies, whether it is profitable growth or profitability, will be repaired. At the same time, 2021 is also the peak period of strategic investment in the Internet industry, and in 2022, especially in the second half of the year, the investment of Internet companies will gradually decrease, and some new growth brought about by superimposed investment will be released. Therefore, we expect that the profit inflection point of these leading Internet companies and platform companies in this round may appear in the next six months, when it is expected to begin to dominate the Davis double-click market of profit repair.
Hong Kong has a new economy and the old economy, the representative of the old economy is the banking and real estate industry, the real estate industry and the banking industry of Hong Kong stocks will also be repaired, the past two years of real estate policy continue to increase, accelerated the survival of the fittest in the industry, standing at the current point in time, the most severe period of real estate policy or has passed, the future will not appear large-scale relaxation, but the policy is expected to be more stable. After the survival of the fittest, the real estate industry will usher in an overall revaluation, the future of the company's profit prospects, that is, the companies within these real estate sectors will appear significantly differentiated, the current round of competitors' profit prospects, that is, the winner's profit prospects will be greatly improved. While it can't be directly reflected in corporate earnings in 2022, its valuation and expectations can be fixed accordingly. The policy robustness of the entire real estate is conducive to enhancing the repair of investors' expectations for the future of real estate, and also enhancing the transparency of profit growth in related industries. We believe that some industries in the real estate industry chain of Hong Kong stocks will benefit.
In addition, the pessimistic expectations of the market for policy uncertainty and uncertainty about the development of the industry in the early stage have been reflected in the stock price, and the entire stock price also reflects the Fed's interest rate hike expectations. The current Hong Kong market is generally afraid of the Fed's interest rate hikes and tightening policies, but we think the market may overreact. The market generally believes that the Fed will end its balance sheet expansion in March and have a rate hike. In the second half of 2022, there may be 3 to 4 interest rate hikes, and a certain probability of shrinking the balance sheet will begin. But against the backdrop of repeated outbreaks and the 2022 midterm elections, the actual rate hikes and tightening may not be as strong. Standing in the framework of the monetary cycle to understand, the Fed release of liquidity is essentially water-heavy, the liquidity in the next few years will remain relatively generous, even if the balance sheet began to shrink, the liquidity of the balance sheet reduction, relative to the liquidity released after the epidemic is quite limited. On a year-by-year basis, liquidity will remain relatively abundant in 2022, and even if the Fed raises interest rates as expected, we believe the impact is more limited to the short end.
On the other hand, looking back at the development of the entire Hong Kong stock market, it is still necessary to return to new values. At present, we may have passed the most pessimistic period of the Hong Kong stock market. After the sharp decline in the weighted stocks, especially the weighted Internet companies and platform companies, as well as the financial real estate sector, the risks in the Hong Kong market have been fully released, and the future risks are more reflected in the fluctuations than in the downward market. The opportunity for the Hong Kong stock market in 2022 lies in the repair of the overall earnings outlook, and macroeconomic economic growth pressure is a relatively large challenge. However, the advantage of Hong Kong stocks lies in the growth of profits, and we will look for new value in the return, which is an important core of the entire Hong Kong stock investment in 2022.
Along this line of thinking, we should focus on three aspects of investment opportunities: first, the return of profitability. We focus on the industries whose earnings are more eroded by inflation in 2021, and the industry where cost pressure is expected to ease or be transmitted downwards in 2022, the stabilization of the policies of Internet companies and real estate companies is also the focus of our attention, and with the gradual elimination of the chip shortage in 2021, it is also expected to see the rapid growth of the profits of related companies. Finally, the consumer industry that has been more affected by the epidemic, with the popularity of vaccines and the introduction of special drugs, the normalization of prevention and control measures, the consumer industry will also recover in 2022, specifically we will be optimistic about some related sub-sectors. The Internet and technology sectors ushered in the inflection point of performance and the inflection point of the superimposed policy, and the future is expected to usher in a double repair of profitability and valuation. The consumer sector has medium- and long-term stable and high profitability, the current expected valuation is at a low point, with the rise of the Z era, it is expected to see the rapid growth of the new consumer sector.
Analysis of investment opportunities in Hong Kong Stock Connect ETFs
The following is combined with several Hong Kong Stock Connect products I manage, and the corresponding analysis is carried out from different angles. First of all, from the perspective of Hong Kong stock consumption, we have carried out some tracking of key companies in the Hong Kong stock consumption sector, overall, in the second half of 2021, the performance is slightly under pressure, and the revenue growth rate and profit are relatively weak, mainly due to the rise in raw material prices. Looking forward to 2022, the revenue growth of the entire sector is expected to gradually pick up, and the cost pressure will still have some uncertainty along with the price of raw materials. We can also see that in fact, some of the food and beverage sectors in the consumer sector have generally made some price increases, which is also expected to increase its income. And the consumer sector in the early stage of the epidemic under the influence of the stock price has a large correction, the current profit of the plate in the past three years at a low position, some of the company's profits have been lowered, the risk has basically been reflected in the stock price, the valuation of the entire sector in the future in 2022 or there may be opportunities to improve, it is recommended to pay attention to the consumer sector in the fundamentals have improved significantly, and has a long-term investment logic of the industry and individual stocks. The specific reasons are as follows: First, the consumer sector in 2021 is still affected by the epidemic. Whether it is the mainland or the Hong Kong market, the epidemic has occasionally broken out, the consumption scene is limited, and the willingness to consume has also suffered a certain loss. At the same time, in 2021, the inventory of some sub-industries is relatively high. But revenue is expected to pick up in 2022, and cost pressures have diminished. Looking ahead to 2022, most companies on the revenue side are expected to gradually recover from the impact of the low base in 2021. At the same time, the current epidemic situation and epidemic control policies will still have a certain impact on some consumption intentions and some consumption scenarios. In the first quarter of 2022, the revenue side of the sector will grow, but it will also be affected by certain uncertainties. The revenue side will stabilize in the second quarter of 2022, the cost side is affected by the trend of raw material prices, the first half of the year will still be a little pressure, but the pressure from the cost side in the second half of the year will be significantly reduced, the valuation of the entire sector is in a three-year low position, and the differentiation trend continues. The food and beverage sector of Hong Kong stocks, which also has a low current dynamic price-to-earnings ratio, has seen a large valuation adjustment from the high point in January 2021, and is at a low valuation level in the past three years. At present, the valuation of Hong Kong stocks is at a low level, and the relative allocation value of the entire Hong Kong food and beverage sector has increased significantly compared with the A-share sector.
After introducing the consumer sector of Hong Kong stocks, let's introduce the technology sector of Hong Kong. The entire technology sector is a representative of Hong Kong's new economy and a special sector of Hong Kong. Through the comparison of the digital economy and the Internet scale between China and the United States, it can be found that the proportion of income in China, whether it is the digital economy or the Internet enterprises, has actually exceeded the United States, and the development of China's economy has a higher dependence on digitization and the Internet. The scale of China's digital economy has maintained a booming trend. In 2020, the proportion of GDP will be as high as 38.6%, which is three times the growth rate of GDP. From the perspective of China's digital economy structure, the scale of industrial digitalization in the entire 2020 is about 80%, the entire three major industries will accelerate digital transformation, the penetration rate and improvement rate of the digital transformation of the service industry in 2022 will be higher, the penetration rate of Chinese netizens will increase year by year, and there is still a large room for progress in the benchmarking world. In the first half of 2021, China's Internet users exceeded 1 billion, the penetration rate of the population was as high as 72%, and the average GDP of Chinese was still very different from that of developed countries, but the ratio of R&D investment to GDP was gradually catching up with developed countries such as Europe and the United States. Internet companies continue to lay out to the sea, and long-term growth is still driven by scientific and technological innovation. China's Internet head enterprises have begun to take shape, and their growth is excellent, benefiting from the digital process of the offline economy, and there is still room for progress and penetration of e-commerce and takeaway. We have concerns about regulatory policies in the early stage, in fact, supervision is conducive to the long-term and healthy development of the entire Internet platform, the market position of the core business has not caused substantial damage, supervision is only to make the Internet platform company more conducive to the rapid development of the overall economy, drawing on the experience of overseas Internet companies being regulated, it can be observed that under the influence of more standardized supervision, the business barriers and long-term logic of overseas Internet leaders have not been fundamentally hit. The market positioning of the head enterprises has not been substantially affected. With the gradual implementation of the entire national regulatory policy, Hong Kong's technology enterprises represented by the new economy, especially Internet platform enterprises, may also achieve rapid development in 2022.
Finally, let's introduce the Hong Kong pharmaceutical sector, the Hong Kong pharmaceutical sector benefits from Hong Kong's special 18A listing system, which opens up a listing channel for companies that have no profit and no income, which also attracts overseas scientists with successful learning to list in Hong Kong to raise funds, and contributes a lot to the development of the entire Chinese biotechnology company. Recently, the entire Hong Kong medical index has fluctuated a lot, and has entered the position of the central lower, and the structure of the plate has actually changed a lot in recent years, taking the Hong Kong Stock Connect company as a sample, splitting the composition of the entire market, finding that the number of new IPOs has increased, the number of companies has expanded, in fact, the number of Hong Kong stock pharmaceuticals in the early days is very small, but thanks to the special listing system after 2018, the number of Hong Kong stock pharmaceutical companies has expanded rapidly, and the largest proportion of the entire sector is CXO companies, and the market value accounts for about 45%, It is followed by the traditional chemical medicine sector, about 16%, followed by innovative drug companies, accounting for about 15.9%, and the fourth is the Internet medical company, which is also a more distinctive sub-sector, accounting for about 10%. Other Chinese medicine, medical device and medical service companies are all less than 5%, which is the current state. At the end of 2016, the largest proportion of market capitalization was traditional pharmaceutical companies, which were 40% at that time. We can see that compared with 2021 and 2016, the proportion of innovative companies has risen rapidly, and the proportion of traditional pharmaceutical companies has gradually declined. The special Hong Kong listing system has attracted a large number of technological innovation enterprises to be listed on Hong Kong stocks, which makes the gene of innovation in the entire Hong Kong pharmaceutical sector more obvious, which is also a significant feature different from A-share pharmaceutical companies. The 18A system just introduced was introduced in 2018, and the new regulations have brought great prosperity to the entire Hong Kong pharmaceutical sector, especially the innovative drug and CXO industries, in the past three years since its introduction. Overall, the traditional pharmaceutical valuation, from the middle of 2022 began to contract, and lasted for more than a year, the current LEVEL of PE is at the lowest level in history, considering that some of the subdivision track is in the process of transformation of the company has positive changes, valuation has a reversal basis, the current valuation is close to the bottom of the history of the company, the risk of stock price downturn is small, we believe that in the process of valuation regression, the whole can make some increased allocation. From the subdivision of each sub-sector analysis, the first is the CXO plate, the listing of a pharmaceutical company in early 2017 is the beginning of the entire Hong Kong stock CXO plate, the end of 2018 the plate fell back, and the 2019 plate formed a Davis double-click. With the development of new drugs and the investment of new technologies, the scientific and technological attributes of the CXO industry have gradually improved, the company has ushered in rapid development, the performance of high-quality companies in the sector is high growth, and the certainty is relatively strong, and the overall performance of biotechnology companies is still guaranteed after a short period of stock price decline. Since the chemical and pharmaceutical sector began in 2018, the collection and procurement of drugs has been carried out for three years, and the procurement of drugs has become a norm. Paying attention to the varieties and exclusive varieties after the collection of pharmaceutical companies is an important point of view for the future plate. Most of the products of traditional pharmaceutical companies have experienced many rounds of collection, the pressure of price reduction has gradually eased, traditional pharmaceutical companies are also experiencing transformation and innovation, increasing investment in research and development, and some high-quality varieties have also appeared in the plate, and the plate has now had some investment opportunities. In the innovative drug sector, first of all, we also pay attention to the results of the innovative drug negotiations in recent years, which is actually better than the previous pessimistic expectations. The outcome of the innovative drug negotiations is mild, which can lead to a valuation repair for the entire sector. The internationalization of innovative drugs is the only way for the entire Chinese pharmaceutical industry to upgrade, and it is also the only way for Chinese innovative drugs to participate in global competition. If you want to become a world-famous multinational pharmaceutical company, you must take the road of innovation. Medical device plate is actually a characteristic plate of Hong Kong, the medical device industry is about to usher in a wave of domestic substitution and independent control, in terms of product competition, many companies will become the next batch of leaders, some companies will also achieve significant overseas income. The medical service industry is also different from the A-share medical sector. First of all, some dental, ophthalmology, characteristic assisted reproduction, private cancer hospitals and other relatively excellent targets, these excellent targets show the ability of steady operation, and are also expected to achieve synchronous growth of endogenous and exogenous. The entire Hong Kong pharmaceutical sector, under the influence of this special innovation gene, after experiencing a deep adjustment in 2021, the valuation also has allocation value, and I am personally optimistic about the growth of the entire Hong Kong pharmaceutical sector in the future.
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