In looking under the hood and seeing that Hong Kong Exchanges is one of the larger holdings in the fund (not a new development) I went to Yahoo Finance to see how that stock has done versus EWH (I did this for most of the larger stocks in the fund), you can see the chart below, and I was surprised to see that in the last few months an ADR for the stock was listed with symbol HKXCY.
A week or two ago Bespoke Investment Group put out a list of all of the NYSE and Nasdaq Chinese stocks but for some reason excluded the pink sheet ADRs and ordinaries. There were over 100 stocks on the NYSE and Nasdaq. Pink sheet ADRs are pretty easy to quote and easy to trade. The ordinaries are more difficult to quote and as far as trading it depends on your brokerage firm.
Schwab is ridiculously expensive because they won't let them be traded over the web. The reps will talk about better execution which of course cannot be true every time and there is no way to know whether a given trade would have worked out the same or better done electronically. I do know that (HOPEFULLY SOMEONE FROM SCHWAB SEES THIS) my clients will never know whether you got them good execution or not but they will see the $100, or more, commission versus the $9.95 or $12.95 they would otherwise pay.
Back to HKXCY. My thesis is that Hong Kong is not a proxy for China but Hong Kong does have a couple of things going for it. It is a financial hub and that role will become larger especially if China goes in the direction so many people think it will. Part of the development of China is in the financial system. This means more stock listing both in China with dual listings in HK. I would there would be more growth in cross listings from other exchanges in the region.
The downside for Hong Kong includes the 7% GDP growth expectations combined with pegging the HKD to the US dollar which stands to be inflationary at some point.
HK Exchanges seems very committed to the dividend. It pays twice a year and based on price of the common on the pay date for its final dividend for 2008 it yields a little over 4% but it needs to be stressed that the dividend history has been quite lumpy and if the company earns less one year they will pay less. Trading volume for Q1 2009 was way down versus Q1 2008 which can't be a surprise but the company was still profitable.
The company appears to have HK$5.5 per share in cash versus a stock price of HK$146. The company does not appear to have any long term debt just liabilities for running the business such as accounts payable and margin deposits and all sorts of employee liabilities like deferred comp. The PE is 36 and ROE is 47.
The numbers come from the company's web site and BusinessWeek, anyone interested in this stock should look for themselves as I could be wrong about any of this and I did not take the time to try to figure out the problems, if any, the company could have from its derivatives business.
For now the stock is expensive and up a lot but the long term prospects for the company are interesting and it would seem not to be a proxy for HK real estate. I could probably make a similar argument for Singapore Exchange as well which appears to have symbol SPXCF. Pinksheet.com has SPXCY as an ADR symbol but there is no volume so I don't know if it is accurate.
For all the talk about finding ways to buy into foreign markets it has to start somewhere. Stumbling across a stock and spending a half an hour trying to get an initial size up is probably where the process starts.
20 comments:
I continually appreciate the effort you put into your blog and twitter commentary. Doing this each day for years while maintaining your regular financial advisory role rates a special award for "love of job".
There are others in the field that try to make a real show out of their commentary. You don't. You combine facts with commentary and wit and leave the hype out.
Doing this every day of the week must be a draining exercise from time to time, but you would never know it based upon the consistency of your body of work.
I, for one, appreciate and enjoy what you produce.
T
Seems like that's almost always an issue with single country ETFs - giant overweight of financials or the single biggest industry within the country.
I guess one just accepts risk and has an exit plan ahead of time.
Speaking of "under the hood." I haven't seen you write about Powershares 1-30 Laddered Treasury Portfolio (PLW) ETF.
Obviously there's bubble risk, interest rate risk, and US Government default risk but what does anyone think of this product? Using in your portfolios?
thanks for the kind comments T. I'm a very lucky person to be able to chill at home trying to study and learn more for a living. to the extent there is ever any utility from my observations is quite rewarding.
anon i might frame it as all products have risks and or flaws. it is important to figure those out before you buy one.
Ditto on the outstanding work you do Roger.
I am hoping you can address or get a discussion going on what I see as a possible earth shaking event coming up the first of the year. Everyone will be able to convert all their monies from tax-deferred to Roth IRA plans. I believe (but could be wrong) that is potentially a 7 trillion dollar event. What affect on the markets, interest rates, and even the national debt do you possibly foresee? Obviously we are talking about a fraction of that number but it could be large. Thoughts-and thanks.
just called schwab. the process of going from ira to a roth does not require selling securities. assuming i was given correct info and all firms are the same with this then i am not sure it would be a market event.
Everyone can already convert their IRA to a Roth IRA. The only difference will be that income limits will be gone temporarily and you'll be able to spread any taxes (converting from pre-income to post-income) over 2 years instead of 1.
Yeah, there's no selling securities. The only earthshaking part could be loss of tax revenue.
06:39 here again.
There are a large number of folks because of income limits cannot convert until 2010. It is true stock does not have to be sold but practically, something has to give. For example, converting a million dollars could generate something on the order of 200k in taxes.( half due in 2011 and half due in 2012 tax years). That money would come out of a. money market funds b. selling of securities c. selling of other assets. Add a number of zeros to the scenario and it could affect markets, interest rates, debt and of course future revenue streams for the government. I would think this is something to think thru...
Allow me to add thanks for these kinds of analyses Roger; looking under the hood is genuinely helpful and not always something I do as completely as I ought. In this case I still question the data coming out of China and do not believe their GDP is actually growing now but, over longer time spans, they clearly remain a destination of choice so the more about ways to access their econonomy the better.
WRT Roth conversions: Since the entire portfolio would be taxed as income, most probably in the top bracket, based on asset values at the time of conversion I suspect the US Treasury will not be unhappy with the trade-off between a big wad of revenue in present dollars (and a reduced federal deficit now) vs. a somewhat reduced flow of future dollars; as dear Scarlett hopefully opined once upon a time, "tomorrow is another day" (and quite possibly a somewhat more inflated day too, heh).
The amount of money due now for an IRA conversion worries/scares even me. I'd think it would send a wealthy person with a huge IRA back to the bunker, frankly.
I did not immediately think of the tax issue. Above a certain income some folks can put a lot of money into an IRA of some kind. I have a SEP and some folks use that individual 401k (is that the name?). If someone makes enough to put $30k into a SEP or the like and then another $5k into an HSA then I think that this reduction in income could help offset the increase in tax from the the conversion. in this case there would be less raiding of the IRA to pay the tax.
not sure how many people this could apply to but it would apply to my situation if i were going to do a conversion.
There are several bills working through Congress regarding the initial distribution age for retirement assets in qualified programs.
Readers may want to consult with their disbursement guru for updates.
T
Add me to the Appreciation list, Roger.
Can anyone name a brokerage or two that does provide direct web access to trading ordinaries on foreign exchanges?
Thanks
Roger,
There are basically two types of china markets - domestic (A/B shares listed in China) and offshore (such as H shares listed in HK, or ADR of chinese tech companies or S-Chips listed in Singapore).
In general, foreigners can only invest in the offshore markets and locals only in the A/B share markets. (therefore comparing the sky high Shanghai A share valuations to the more reasonable H share valuations since the local market is closed).
EWH tracks MSCI HK so it does not have H share expsoure. However, I would say there is a correlation to the china growth because most HK companies have large China exposures directly or indirectly.
FXI might be a better pick and it focuses directly on china plays. Most of its companies seem to be H share hong kong listed chinese companies.
In fact, over 50% of the market cap and turnover in HK are derived from Mainland Chinese companies. This percentage will only get higher.
One could also use a broker like interactivebrokers to buy the stocks locally as well.
Good Luck.
AI
as i look at a multi year chart comparing Shanghai and EWH I draw a different conclsuion. your argument sounds like the US multinational argument a a proxy for foreign exposure which i do not agree with. benefiting from is not the same as proxy for
I never said EWH was good proxy for shanghai.
I said FXI is a better proxy since it invests in HK listed chinese companies that the world can invest in.
You can NOT compare the Shanghai (closed to foreigners) market to offshore markets. Apples and Oranges. In fact, there are dual listed companies that have double the valuation in China than Hong Kong. There is NO arb mechanism.
So I suggest investing in the H Share Index or HSCEI instead.
BTW, Hong Kong is a Special Adminstrative Region of China. It is a part of China.
NETS has an H share ETF that I thought had potential but then the entire product line got shut down
had not has, sorry
FXI is basically a H Share ETF:
http://us.ishares.com/content/stream.jsp?url=/content/repository/material/fact_sheet/fxi.pdf&mimeType=application/pdf
The 25 largest and most liquid Chinese companies listed in HK.
Plus, the ETF has sizable assets and is liquid.
For those looking for yet more ETF ideas, here are the following, as gleaned from today's Financial Times.
Second Worst Investment Idea of the Day:
FT's Ruth Sullivan reports on ETFs wrapped into structured products at your local private bank. ... Doesn't the phrase 'structured products' just roll off your tongue? Leverage to boost returns, derivatives for downside protection. And fees, fees, fees. Don't we know how this movie ends?
Worst Investment Idea of the Day:
FT's Steve Johnson reports that FaithShares, of Oklahoma City, is ramping up ETFs for Baptists, Catholics, Lutherans, Methodist and 'Christians.' (FaithShares web site www.faithshares.com says registration statement has been filed but hasn't become effective yet. Waiting for a sign from heaven?)
Johnson wonders if they'll do one for the UK's "fourth largest religious community (2001 census), the Jedi Knights."
And speaking of China, how about one for Falun Gong/Falun Dafa?
As Johnson might have asked, what's an innocent punter to think of all this?
BillM
The wife's IRA has enough non-deductible contribs to exceed the value of the IRA so the conversion there next year will be a no tax event.
Now my IRA has non-deductibles too but plenty of gain (and much bigger). It would be nice if I could "harvest" loss in DW's IRA and convert some of my IRA to create a zero event but #1, I can't find a thing on thisand #2, I can't imagine IRS will allow.
DE
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