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Dr Chan: Buy High Dividend Stocks Despite Looming Rate Hike?
By: Dr Chan Yan Chong
Articles (200) Profile

On 18 November, the US Federal Reserve disclosed the minutes of their rates meeting in October, which showed that most of its members were inclined towards raising interest rates in December this year. Even though the intention for a rate hike is now very clear, Wall Street actually rallied and climbed further, pushing the Dow Jones Industrial Average even higher to close near its historical high.

Expectation of Rate Hike Did Not Cause Stocks to Fall

While the minutes of the Fed meeting shows that a December rate hike is likely, the fact that the stock market rose instead of fell demonstrated two things. Firstly, the market has largely digested the fear factor and it is no longer as worried about the hike. Investors believe that even with the rise in interest rates, US companies will still be able to make money.

Secondly, the terrorist attacks in Paris caused investors to reckon that under the present situation, the Fed will probably not raise interest rates. After all, the minutes released on 18 November were for October’s meeting, so they are outdated by now. After the terrorist attacks in Paris, countries in Europe will seek to ease monetary policies, increase military and anti-terrorism spending, and all of which are good news to the stock market.

Wall Street is still the dominant factor in Hong Kong’s stock market. If Wall Street can shrug off the pressure from the rate hike – especially if the Fed really does raise interest rates in December – and continue to rise, or even hit a new high, that will be a truly generous Christmas gift to the Hong Kong stock market.

 Dividend Stocks Still Performing Well

The probability of a December rate hike in the US is very high now, and conventional stock market wisdom tells us that a rate hike bodes ill for dividend stocks, as they become less attractive when banks raise interest rates. However, despite the recent intensification of expectations of a rate hike, many dividend stocks still managed to fare quite well in the current market.

The most outstanding stock is the Hong Kong-listed HK Electric Investments (2638), whose share price hit a new record high recently. Another utilities stock, CLP Holdings (0002) performed well too, rising to just a smidgen short of its 52-weeks high. The Hong Kong and China Gas Company’s (0003) closing price on 27 November was not far from its 52-weeks high too (bear in mind that this counter has been issuing bonus shares at 10 shares for 1 almost every year).

So why does the market seem to act against the conventional wisdom? Truth is, the stock market has experienced extreme volatility in recent months, which caused many to seek a safe haven. Utilities shares offer both stability and bonus issues, so people are parking their money there. Even if banks were to raise interest rates, the rates would still not be as attractive as utilities stocks that offer bonuses. Utility shares are not the only counters that offer these benefits, for other dividend plays are equally attractive for the same reason. For example, Link REIT (0823) rebounded 20 percent from a low in September, just missing its record high by only 10 percent.

In light of this, some high-dividend stocks seem very appealing now. Among them, banking stocks are the most attractive. HSBC Holdings (0005) offers a yield of up to 6.2 percent while the four major Chinese state-owned banks offer very decent dividend yield ranging from 6.5 percent to 7.4 percent, among which the Industrial and Commercial Bank of China (1398) is the largest and leading state-owned bank. Bank of China (3988) has the strongest overseas experience, and will surely benefit most from the globalisation of the Chinese yuan.

Chinese Crackdown on Insider Trading

China’s Securities Regulatory Commission has formally commenced investigations into China’s three major securities companies, and the Chinese A-shares market fell sharply in response. On 27 November, the Shanghai Composite Index fell 199 points in a day, retreating to the 3,400-point level. On 30 November, it fell by another 100 points at one point but fortunately did a V-shaped recovery to hold steady at the 3,300-points level.

Not long ago, a high ranking official from the Securities Regulatory Commission was arrested, sparking rumours within the market that top officials from the commission are using insider information to make money. It seems that the Central Commission for Discipline Inspection is really intent on overhauling the entire Chinese securities industry.

For a long time, powerful individuals in the Chinese securities industry have been treating insider information as their personal assets, which they use at will to trade in stocks. To a powerful leader, insider information is something you can use yourself or sell to any willing buyer.

This time round, the investigation into securities companies was ordered by the government, and its scope covered widespread violations within the securities industry as a whole, so its impact is more far-reaching than the arrest of one or two officials. All the leaders of state-owned enterprises are Communist Party cadres; when one official is arrested, another cadre will take his or her place, so that will have little impact on the business of these enterprises.

Securities firms found to have irregularities in its operations may be fined, and certain unlawful practices will be prohibited and these will affect the business and income of these securities firms. Therefore, it is still not the time to go bargain hunting for Chinese securities firm shares. Hong Kong securities firm shares suffered collateral damage and prices have fallen. This time, you can go bargain hunting among Hong Kong securities shares, as only Chinese securities firms are being investigated and Hong Kong securities firms are not involved.

On the day investigations were initiated, the stock market fell across the board out of an inexplicable sense of fear. When a large number of shares take a tumble together, it is just a herd instinct response in the stock market, so there is no need to panic. Basically, the problem is only with securities firms for now, while the rest of the companies are not affected.

Investors’ Takeaway: Wait for Share Prices to Stabilise

When the market is not moving, investors can only look to individual stocks. Unfortunately, many individual stocks have had too little time to roll; once there is good news, stock prices would rise but would quickly be sold down. In recent months, some of the counters that have been badly battered over the past two years have reported good news, and stock prices are rising. However, since there has been too many of such shares that have been speculated on, the rally is not sustainable.

When a company returns to the black, it is naturally a good thing, and is sure to provide some support for future share prices. However, we do not have to rush in and buy rashly. In general, good news will immediately receive media coverage and recommendations by stock analysts. We should allow the good news to cool off and wait a month before entering the stock market.

One month after the good news, the temporary rush would have dissipated, so share prices will be relatively more stable. After all, good news is good news. So long as you have the patience to hold for half a year, the next corporate performance report will surely bring more good news, perhaps even better news. By then, stock prices may go through another round of speculative rallying.

Dr Chan Yan Chong is a renowned investment expert with many accolades under his belt.

Please click here for more information about this author.


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