Hong Kong’s Top Stock-Trading Strategy Is Quietly Unwinding

John Cheng and Yanhua Wang, Bloomberg News

Passengers ride a Star Ferry vessel across the Victoria Harbor in Hong Kong, China, on Tuesday, June 28, 2022. At the tip of Hong Kong's iconic former airport runway on Victoria Harbour that once connected the financial hub with the world, masked officials from the city and the mainland last week celebrated the completion of a hastily built Covid-19 quarantine center. Photographer: Chan Long Hei/Bloomberg , Bloomberg

(Bloomberg) -- Hong Kong’s once-hot dividend trade is losing steam, as China eases both Covid restrictions and its crackdown on beaten-down growth names.

For the first time since late 2020 -- when China initially brought the pandemic under control -- buying payout kings hasn’t been a winning strategy. Going long on Hang Seng Index members that pay the most dividends while shorting those with fewer payouts yielded a net loss of 14% between April and June, setting the quarter up for its first loss in six.

“Market interest in high-dividend stocks is falling. Many investors are sacrificing their positions in these defensive stocks to get liquidity for other names,” said Shuo Huang, portfolio manager of the ChinaAMC Select China Leap Equity Fund, adding he favors low-valued internet and electric vehicle shares in the short term.

Investors in Hong Kong are rotating into growth from value, unlike the rest of the world where rising interest rates are hurting demand for tech shares. The Hang Seng Tech Index is up 10% this month, trouncing the Nasdaq Composite’s 7.5% loss through Tuesday, with Hong Kong’s gauge boosted by a dialing back of China’s crackdown on tech giants and easing of virus curbs that’s boosted consumer discretionary plays.

Investors flocked to Hong Kong’s high-dividend stocks, long retail punter favorites, in the past year, as they sought safety in a market hammered by regulatory crackdowns and geopolitical tension. Oil refiner Sinopec and shipping giant Orient Overseas International Ltd.’s almost-16% dividend yields were especially popular, with payouts towering over the around-4% levels of their Hang Seng Index peers.

To be sure, dividend payers are not completely out of favor and still have room to run. Some Chinese banks and telecom firms yield more than 7% -- “still attractive” -- compared with the about 3% yield in US 10-year Treasuries, according to China Asset Management Co.’s Huang.

On top of that, big consumer tech companies need a strong recovery in consumption, something that “is far from certain in the near future,” said Jason Hsu, chief investment officer at Rayliant Global Advisors Ltd. “Value stocks dominated by traditional economy firms and large state-owned enterprises are likely a necessary part of the aggressive Chinese fiscal stimulus plan.”