The recent bull run in the markets are primarily fueled by technology stocks and mainly Chinese technology concept stocks. Its more of a generalized segment that includes, electric vehicle, Saas, mobile gaming and platform ecology. As the HKSE index evolved out from a concentration of traditional financials/property developers like STI, into a more Chinese technology mix like Tencent, Alibaba, Meituan and Xiaomi(taking up 24% weightage of Hang Seng), it is slowly closing the gap with S&P500.
The PE difference between the two however is still quite extreme.
HK is currently trading at a PE of 15.25x. The lowest it has gone was 6.519X during 27th Oct 2008 and the highest it has gone was 24.48x during 30th Oct 2007. If we look at HK's 10 year period:
Its current level should still be acceptable because its current 24% weightage of giant Chinese technology stocks were only included in 2020. These giant tech conglomerates are still growing rapidly. Alibaba for example has a 8 years FCF CAGR of 30% with a topline CAGR of 33.3%.
S&P500's PE ratio is currently at 38.21x as of 19th Jan 2021. The lowest it has gone was 5.31x during Dec 1917 and highest it has gone was 123.73x during May 2009 before the financial crisis. Its PE ratio is currently more than double HK's.
Valuation is important as it impacts the earnings and subsequently the dividend to earnings payout ratio per share(yield) for the companies that you own. It should theoretically impact the long term price performance in a normalized market. Do also note that US stocks have a 30% tax on dividend but HK stocks does not. But US stocks will always trade at a premium to its Chinese counterpart due to its democratic governance compared to a top down communist-capitalistic one.
Do note that since 2020 is a one time anomaly because of Covid, the earnings of big companies might be temporarily impacted and hence the high PE could be due to that. Coupled with market pricing in the anomaly by looking past it and hence causing the share prices to increase.
S&P 500 has a 27.6% technology component(quite close to HK) but has a much lesser financial component exposure of only 10.4%. With all things being equal, the HK market looks the most attractive to me, in terms of valuation and growth potential. Chinese middle class population alone is more than double the US population.
STI's PE ratio is the cheapest among the three at 13.96x. It is justifiable because more than 40% of the index are traditional banks like DBS, UOB and OCBC. The other 60% are mostly traditional property developers and telecommunication. The growth and scalability potential might not be as favorable.
Full disclosure, I have vested interest in S&P500 ETF, HK Tracker ETF and STI ETF. They are currently up 52%, 26% and 17% respectively.
Snap shot of my portfolio performance as of today: Total profit for 2021: S$38,228.87. Mainly due to XD which was up 20% today, likely due to Station B dual listing on HKSE.
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