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Friday, July 19, 2024

Hang Seng Ladder Strategy

By Century Financial in 'Investment Insights'

Hang Seng Ladder Strategy
Shariah-Compliant Stock

Hang Seng Index

Low Valuation and Evolving Macroeconomic Landscape

The Hang Seng Index (HSI) tracks the performance of the 50 largest companies on the Hong Kong exchange. Renowned for its representation of Asian markets, the HSI encompasses diverse sectors like consumer discretionary, finance, and technology. Some of its largest stock constituents are well-known companies such as Tencent Holdings, Industrial & Commercial Bank of China, PetroChina, and Alibaba Group Holding.

Despite China’s promising growth prospects, concerns over the country’s economic macroenvironment have led to a near 37% decline in the index. Challenges in China’s equity landscape, including legal uncertainties, limited transparency in listed companies, and a lack of focus on minority shareholder returns, contribute to this decline. With the HSI currently around 40% below its peak, optimism arises from China’s easing stance on the tech sector and policymakers ramping up support through stimulus is buoying the outlook for recovery.

Investing in China presents positive prospects primarily due to its remarkably discounted valuations. The current metrics, as of writing, are considerably lower at 9.7/1.2/1.0, reflecting cheap valuations and positioning it as one of the attractively priced major markets globally. Additionally, these deep-discounted valuations and high-dividend Hong Kong-listed shares can potentially attract foreign attention and subsequently foreign inflow prospectively benefiting the index.

The Hang Seng Index has faced challenges in recent years. However, investors who can look past short-term noise stand to benefit in the long term. The Hang Seng’s stocks are deeply discounted and show promising growth prospects in China’s evolving macroeconomic landscape.

Ladder Strategy

Ladder Portfolio - Hang Seng Index
Total Investment in Portfolio $100,000
Investment in Phases 33% 33% 33%
Investment Value $33,000 $33,000 $33,000
Entry Levels Entry 1 Entry 2 Entry 3
Name Quantity Last Price* Total Quantity Support Total Quantity Stop Loss Total
HSI Index 14 HKD 18,293 $33,000 15 HKD 17,380 $33,000 16 HKD 16,328 $33,000

*Last Price as on 11th July 2024
Date: 12th July 2024
Source: Bloomberg

Multi-Decade Low Valuation &
Yearly Price Returns in the Last Decade

 

The Hang Seng Index is currently trading at HKD 17,832 with a P/E ratio of 8.7. Estimated earnings for 2024 are projected to be HKD 2,041. In October 2022 and January 2024, the index declined to a potential support level where the P/E ratio was 8.0. By multiplying the projected earnings of HKD 2,041 with a P/E ratio of 8.0, we arrive at a value of HKD 16,328, which could potentially serve as a strong support level for the index.

Date Price Return (%)
31/12/2013 -0.02%
31/12/2014 1.14%
31/12/2015 -8.15%
30/12/2016 3.16%
29/12/2017 35.07%
31/12/2018 -15.30%
31/12/2019 12.17%
31/12/2020 -4.60%
31/12/2021 -14.83%
30/12/2022 -15.01%
29/12/2023 -15.38%
11/07/2024 -4.43%
Risks and Assumptions related to Back-tested trading strategies
The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
The back-tested strategy might be at risk of data dredging, which is the behavior of testing multiple hypotheses at one time, resulting in picking the data that best supports your main hypothesis.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.
A trading strategy that performs well on multiple datasets from one market (e.g., forex) might not perform as well in another market (e.g., stocks).
The strategy may not depict accuracy in terms of spread changes due to the spread-widening events.

Disclaimer: Century Financial Consultancy LLC (CFC) is duly licensed and regulated by the Securities and Commodities Authority of UAE (SCA) under license numbers 20200000028, 20200000081 and 301044 to practice the activities of Trading broker in the international markets, Trading broker of the OTC derivatives and currencies in the spot market, Introduction, Financial Consultation and Financial Analysis, and Promotion. CFC is a Limited Liability Company incorporated under the laws of UAE and registered with the Department of Economic Development of Dubai (registration number 768189). CFC has its registered office at 601, Level 6, Building no. 4, Emaar Square, Downtown, Dubai, UAE, PO Box 65777.

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