Dividend Stocks The Best Way to Buy China

Transcription

1 Dividend Stocks The Best Way to Buy China The explosive economic growth China has experienced over the last two decades may be slowing, however, China still remains a very attractive long term growth market for investors, particularly when compared to the growth potential of most major developed economies. China is currently transitioning from an export-focused economy to an industrialized consumer-focused one. While this type of transition usually displays more modest economic growth, it also creates substantial opportunities for China s domestic equity markets, including for mainland and Hong Kong-listed firms that pay larger dividends. Pre-financial crisis, China s GDP growth peaked at about, an unbelievably high level of economic growth. Much of this was due to the country s forced infrastructure and industrialization program. With the transition to a more consumer-focused economy, this growth has slowed. However, according to Mirae Asset Global Investments, China s forward GDP growth should still remain in the 6% to 8% range over the next few years nearly four times the growth rate targeted by developed economies such as the U.S. and Canada. Timeline 16 Series of World GDP Growth (21-214E) E China EM Asia India Emerging Markets World Developed Markets Source: IMF, World Economic Outlook Database as at October 31, 214. Much of the previous investment in China focused on its infrastructure development. However, the largest growth factor of the Chinese economy is actually its burgeoning middle class. ALPHA BENCHMARK BETAPRO Innovation is our capital. Make it yours.

2 Consumer of second resort Private consumption, Strn at current prices Total Consumption Increase (In USD billion) China Japan * Germany Japan USA China Forecast Source: IMF, World Economic Outlook Database. As illustrated in the above charts, China surpassed Japan as the world s second largest economy in 213, and continues to have, by far, the largest consumption growth rate of the world s four biggest economies. In fact, according to the International Monetary Fund, at its current rate of growth, China is expected to effectively see its GDP double by 23 to more than $22 trillion. Based on this data, the potential long-term upside potential of China s economy seems certain. We believe this makes it an attractive target for foreign direct investment. Rise of the Chinese Investor The rise of China s middle class has also led to the rise of more sophisticated Chinese investors. The demographic ascendance of Canada s Baby Boomer population, mostly witnessed between 1982 and 1999, was a key driver of the greatest bull market in the stock market s history. Comparatively, China s equity market is essentially in its infancy and many beleive will likely follow a similar growth trajectory. Increases in middle class discretionary income will presumably result in greater investment from the Chinese retail investment market into its domestic equities. In fact, this rapid rise of the Chinese investor was seen as one of the leading contributors to the Asia ex-japan 19% parabolic rise of equity valuations in early 215. While valuations on mainland Chinese equities 31% have subsequently retracted, India 6% 21 there is no indication that this long-term trend of domestic equity investment will slow. 1 The charts below show both the rapid growth of the Chinese middle class Indonesia and the subsequent 26% significant over-investment in cash instruments by domestic investors. Those cash holdings are earning anemic Thailand 28% yields which continue to decline 44% due to looser Chinese monetary policy. This, in effect, is driving Chinese investors towards equities Chinato generate higher 27% total returns. Percentage of Population in Middle Class across Asia Philippines Malaysia 18% % Household % Asset 1% Mix Across 3% Secect 4% 5% Countries 6% Asia ex-japan India Philippines Indonesia Thailand China Malaysia 6% 19% 1 18% 26% 28% 27% 31% 44% % % 1% 3% 4% 5% 6% Source: CLSA (215) Equity Mutual Fund Insurance & Pension Other Securities Other Currency Equity Mutual Fund Insurance & Pension Other Securities Other Currency % 11% 7% 54% 3% 27% 5% 9% 28% 3% 56% 1% 5% 29% 3% 17% CN JP UK KR AU TW US Source: Mirae Asset Global Investments. China and Taiwan as of 212, others as of % 17% 4 7% 6% 2 21% 15% 9% 31% 11% 33%

3 It s important to note that despite the large correction in Chinese equities in August 215, the CSI 3, the most widely followed index for mainland equities, is still up approximately 2.5% in 215 as at December 8, 215, and more than 18% for the 12 months ended for the same period, meanwhile the S&P 5 was down.35% and the S&P/TSX 6 TM Index was down -1.59%. Another key consideration for investing directly in Chinese equities is that much of the consumption growth will favour Chinese domiciled companies rather than foreign multinationals. According to Forbes, in June 215, five of the 1 largest publicly traded companies in the world by market capitalization were Chinese-based firms, many of which are Hong Kong listed. China Top 5 Brand Value (US$ M) 214 Global Top 1 brand value increase 41% vs Brazil Top 5 brand value decrease 4% vs Latam Top 5 brand value increase 3% vs , ,369 32, , , % Source: BrandZ TM / Millward Brown The Dividend Opportunity One area often overlooked by foreign investors is the emergence of high dividend paying stocks in China. As the equity market matures and stocks hit sustainable levels of revenue, it s natural that they will start to pay dividends similar to stocks listed in developed markets. The compounding power of this dividend performance can be observed in the divergence between the total return and price return of both the CSI 3 Index and Hong Kong s Hang Seng Index in their respective local currencies, as at November 3, 215. For the 1-year period ended November 3, 215, dividends have accounted for about 4% of the total return of the Hang Seng Index and more than 9% of the total return for the CSI 3 Index over the same period. Investment Growth 2 18 Hang Seng HSI PR HKD Hang Seng HSI TR HKD CSI 3 CNY CSI 3 TR CNY /3/21 11/3/211 11/3/212 11/3/213 11/3/214 11/3/215 Source: Morningstar Direct as at November 3, 215. The rate of returns show in the chart are used only to illustrate the effects of compound growth rate and is not intended to forecast, imply, or guarantee the future performance of any particular index shown, which will vary. The performance data for all of the indices shown assume no commissions, management fees, expenses, taxes or other charges that would have reduced returns, and includes the reinvestment of all distributions. The indices are not directly investable.

4 Trailing Returns 1 Month 3 Months 6 Months YTD 1 Year 3 Years 5 Years 1 Years 15 Years Common Since Date Hang Sang HSI PR HKD /31/1995 Hang Sang HSI TR HKD /2/199 CSI 3 CNY /8/25 CSI 3 TR CNY /31/24 Source: Morningstar Direct as at November 3, 215. The indicated rates of return in the Performance Table are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends and distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any investor that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the index or returns on investment in the index. The indices are not directly investable. The importance of dividends is only growing, and at an explosive pace, according to S&P Dow Jones Indices LLC., with dividend payouts increasing from approximately $24 billion in 29 to more than $7 billion in 214. Dividends-How China Has Evolved Year Size of Dividend Pool (USD Billions) % of Dividend-Paying Companies Source: S&P Dow Jones Indices LLC, FactSet. Dividends per share and earnings per share are reported in RMB. S&P China A BMI data from Dec. 31, 29 to Dec. 31, 214. Past performance is no guarantee of future results. Table is provided for illustrative purposes and reflects historical performance. The growth of these dividend payouts makes the dividend space increasingly attractive. Other benefits of dividend investing include the tendency of dividend stocks to have lower volatility than non-dividend payers; and high dividend payout can provide an offset to periods of heightened volatility that can occur in emerging market regions like China. Why Hong Kong? Hong Kong is an important market for mainland Chinese companies looking for foreign investment. Unlike China s tightly regulated A-Shares market, there is no quota for the amount of Hong Kong-listed stocks a foreign investor can buy. Chinese companies also benefit from a much wider distribution scope through a Hong Kong listing. In addition, many of the Hong Kong domiciled companies have strong ties to Mainland Chinese economic development. Generally, companies listed on the Hong Kong exchange have larger market capitalizations and more transparent accounting structures in order to meet the rigorous regulatory scrutiny of being listed in Hong Kong. Up until the August 215 correction in Chinese equities, Chinese A-Shares were trading at a premium to other types of Chinese shares, including Hong Kong listed H-Shares. This was not a result of any added benefit to the structure of A-Shares. The premium being paid for A-Shares was seen as a reflection of the fact that Mainland Chinese investors are only allowed to purchase A-Shares, so investors were benefitting from domestic retail demand for equities. The Hang Seng High Dividend Yield Index (the Underlying Index or the Index ), which the Horizons China High Dividend Yield Index ETF ( HCN ) seeks to replicate, offers exposure to Chinese dividend paying equities. The Index is designed to measure the performance of Hong Kong listed equity securities characterized by high dividend yield.

5 The Index selects from the entire Hong Kong-listed Universe of large-cap and mid-cap stocks under the Hang Seng Composite Index and REITs and then screens them for quality and risk characteristics, such as market capitalization and liquidity. The Index then weights the stocks based on their dividend yield. The top 5 stocks with the highest dividend yields are selected for the Index. The listed securities in this Index have done quite well with a lower standard deviation than the FTSE China Index and MSCI China Index, two widely-followed investable Chinese equity benchmarks used by foreign investors. In fact, this index has substantially outperformed the broad Chinese benchmarks on a one-year basis, largely due to the lower volatility experienced by the Hong Kong listed stocks for the six months ended November 3, 215. As of November 3, 215, the Index currently yields about 5.1%. Major Chinese Total Return Indices 1% Major Chinese Total Return Indices 8% Cumulative Return 6% 4% % - -4% -6% -8% Hang Seng Index (Total Return) FTSE China 5 Index (Total Return) MSCI Emerging China (Net Total Return) Hang Seng High Dividend Yield Index (Total Return) 6/29/27 6/29/28 6/29/29 6/29/21 6/29/211 6/29/212 6/29/213 6/29/214 6/29/215 Source: Bloomberg as at October 31, 215. The rate of returns show in the chart are used only to illustrate the effects of compound growth rate and is not intended to forecast, imply, or guarantee the future performance of any particular index shown, which will vary. The performance data for all of the indices shown assume no commissions, management fees, expenses, taxes or other charges that would have reduced returns, and includes the reinvestment of all distributions. The indices are not directly investable. Name 1-Month 3-Month 6-Month YTD 1-Year 3-Year 5-Year Hang Seng Index (Total Return) Hang Seng High Dividend Yield Index (Total Return) FTSE China 5 Index (Total Return) MSCI Emerging China Net Total Return Source: Bloomberg as at October 31, 215. Since Date 6.15% -6.84% -1.49% 11.66% 13.25% 15.18% 8.54% 6.7% 6/29/ % -6.26% -1.66% % 16.44% % N/A 6.7% -5.5% % 5.55% 14.33% 14.4% 5.4% 3.84% N/A 6.46% -5.27% % 15.13% 14.75% 6.17% 5.18% N/A The indicated rates of return in the Performance Table are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends and distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any investor that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the index or returns on investment in the index. The indices are not directly investable.

6 ALPHA BENCHMARK BETAPRO Horizons ETFs is a member of Mirae Asset Global Investments. Commissions, management fees and applicable sales taxes all may be associated with an investment in the Horizons China High Dividend Yield Index ETF managed by Horizons ETFs Management (Canada) Inc. ( the ETF ). The ETF is not guaranteed, its values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the ETF. Please read the prospectus before investing. The views expressed herein may not necessarily be the views of AlphaPro Management Inc. or Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors. The mark and name Hang Seng High Dividend Yield Index (the Index ) is proprietary to Hang Seng Data Services Limited ( HSDS ) which has licensed its compilation and publication to Hang Seng Indexes Company Limited ( HSIL ). HSIL and HSDS have agreed to the use of, and reference to, the Index by Horizons ETFs Management (Canada) Inc. ( the Issuer ) in connection with the Horizons China High Dividend Yield Index ETF (the Product ). However, neither HSIL nor HSDS warrants, represents or guarantees to any person the accuracy or completeness of the Index, its computation or any information related thereto and no warranty, representation or guarantee of any kind whatsoever relating to the Index is given or may be implied. Neither HSIL nor HSDS accepts any responsibility or liability for any economic or other loss which may be directly or indirectly sustained by any person as a result of or in connection with the use of and/or reference to the Index by the Issuer in connection with the Product, or any inaccuracies, omissions or errors of HSIL in computing the Index. Any person dealing with the Product shall place no reliance whatsoever on HSIL and/or HSDS nor bring any claims or legal proceedings against HSIL and/or HSDS in any manner whatsoever. For the avoidance of doubt, this disclaimer does not create any contractual or quasi-contractual relationship between any broker or other person dealing with the Product and HSIL and/or HSDS and must not be construed to have created such relationship. For further information please go to H