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EWH: Hong Kong Equities Are Not Cheap, But Remain Internationally Competitive

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  • Hong Kong equities are mainly exposed to financial sectors. Therefore, a rise in long-term interest rates are supportive for funds such as EWH.
  • EWH offers mainly U.S. investors an opportunity to invest in Hong Kong equities, which include companies like AIA Group Ltd (a major insurance company).
  • In terms of overall valuation, EWH is not cheap, with a normalization to the country market risk premium implicating downside potential.
  • However, a directional comparison suggests that EWH still offers better value than U.S. stocks, which trade at even greater heights.
  • EWH probably still remains a good alternative to U.S. equities, and a good international diversifier. I would be unsurprised if EWH outperformed.

The iShares MSCI Hong Kong ETF (NYSEARCA:NYSEARCA:EWH) is an exchange-traded fund that provides predominantly U.S. investors with the opportunity to gain direct exposure to Hong Kong equities. EWH provides exposure to large and mid-sized companies in Hong Kong, with 38 holdings in total (as of April 1, 2021). The expense ratio is 0.51%, which is comparable to other country-specific funds offered by iShares and other major providers.

The largest sector exposures that EWH has are: Real Estate (21.45% of the fund as of April 1); Insurance (20.57%); Capital Goods (13.99%); Diversified Financials (13.20%); and Utilities (9.21%). A full breakdown is provided below, in which you will also notice Banks represent a further 5.90% of the fund.

EWH Sector Exposures in April 2021(Source: iShares.com)

If you add up together Real Estate, Insurance, Diversified Financials, and Banks, you have over 60% of the fund invested in these largely "financial" sectors. As such, EWH is in some ways a bet on higher interest rates and/or inflation.

As long-term rates have carried a hawkish bias over recent months, most notably in the U.S., financial stocks have been performing fairly well. Sectors such as real estate also tend to do fairly well in times of rising inflation. So, funds such as EWH, even if they are country-specific, are quite good diversifiers in terms of both geography and business cycle positioning. Yields could certainly fall back down (see chart below); however, in the case that rates continue to lift, EWH would be a reasonably good place to be.

The chart below is a long-term channel of the U.S. 10-year Treasury yield. Notice that the 10-year yield is potentially about to break out of the channel. If, however, the 10-year yield falls back into its long-term trend (even if after a short-term blip outside of the channel), while this may hurt financial stocks it will still likely hurt the

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Providing commentary and analysis, principally focused on global macro, foreign exchange, and equities as an asset class. Primary interests include equity investing from an international perspective, and FX fair values.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (1)

Too expensive and too much risk in my opinion.
Interesting data and commentary.
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