Hong Kong’s Hang Seng Index has some truly terrible companies in it. Here are two to avoid at all costs. –
In Hong Kong, it’s no secret that the Hang Seng Index has been a consistent disappointment. The reasons for this are no surprise.
The majority of the components that make up the index are “old economy” stocks that aren’t worth investing in, either five years ago or today. So far in 2020, the Hang Seng Index is down by around 13%.
Unfortunately for those companies, the situation doesn’t look any better now after last year’s anti-government protests and then with the Covid-19 pandemic hitting.
However, some of the Hang Seng’s constituent stocks have been terrible long-term performers over much longer stretches.
With that in mind, if you like money (and want to hang on to it rather than see it disappear) then don’t bother buying these two big Hang Seng Index stocks.
HSBC Holdings plc (SEHK: 5) has been one of the biggest losers over the past decade. Its shares have more than halved over the period.
Given the bank has always made up a significant part of the Hang Seng Index (as of June it had a 9.3% weighting), its poor stock performance has in turn been a key drag on the benchmark index.
During the past ten years, HSBC has been wracked by terrible strategic decisions and an absolutely abysmal return on equity (ROE) that typically bounced around in the mid- to high-single-digit percentage range.
Its “global banking model” is effectively a deadweight for the firm given its terrible capital allocation decisions.
What’s more, with its dividend now suspended – with no date in sight of when it might resume – the only saving grace it had as a “dividend stock” is now gone.
More recently, the bank has been buffeted by US-China tensions and been caught in the middle of geopolitical wrangling between the two superpowers.
As the flag bearer of the “old economy” sector that has had its day in the sun, HSBC is definitely one Hang Seng Index stock to avoid long term.
2. China Mobile
The world’s largest mobile operator, by subscriber numbers, China Mobile Ltd (SEHK: 941) is another company that investors should avoid if they want to hang on to their hard-earned money. China Mobile has just under a 4% weighting on the Hang Seng Index.
Although the company offers up a seemingly attractive dividend yield of 6%, it comes with caveats. The main one is that its shares have been on a downward trajectory for a while.
The higher dividend yield reflects that poor performance. Over the past five years, China Mobile shareholders have seen the value of their stock holdings decline by 50%.
The company’s dividend growth has been anaemic over the past five years, with its 2019 dividend only slightly higher than the one paid out for 2014.
What’s more, as a state-owned enterprise (SOE), China Mobile puts the Chinese government’s interests first and above those of shareholders.
This has been clear from a number of transactions. The most recent example was earlier this month when China Mobile outbid property developers for a piece of land in Hong Kong – its winning bid was HK$5.6 billion (US$723 million).
News of the massive bid came out in early July, shortly after Hong Kong’s controversial national security law came into place. The Chinese government is well known for directing SOEs to buy up assets if it helps them meet their overarching strategic goals, such as “stability”.
How China Mobile shareholders would benefit from a plot of land in the New Territories is unclear. According to the SCMP, it will apparently be used as a data centre or logistics facility although the exact reasoning behind the purchase wasn’t 100% transparent.
Foolish bottom line
If long-term investors take a closer look at the stocks that make up the Hang Seng Index, they will be able to see there are some terrible companies in there.
Avoiding the losers can be as important as picking the winners. In that sense, investors should avoid “old economy” stocks like HSBC and China Mobile if they want to preserve their wealth.
Both companies’ shares have had awful long-term returns and nothing they have done recently suggests that investors should even consider buying their stock.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Tim Phillips doesn’t own shares in any companies mentioned.
The Motley Fool Hong Kong Limited(www.fool.hk) 2020