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Where is the Value: HK vs US

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  • Post last modified:December 21, 2018

Considering equities are at all time highs, portfolio managers can at times have trouble finding stocks priced attractively. With advances in electronic trading, these managers now have a sample size greater than ever. Investors can now diversify to a much larger extent, avoiding the home bias, and explore equities from markets traditionally overlooked by the competition. But at the end of the day it’s about value.

The best performing sector worldwide of late has been technology. To that point, the IXN (iShares Global Tech ETF has outperformed the Nasdaq 100 by 500 bps over the last 6 months and about 700 bps over a 5 year period. The value add in this ETF vs. the traditional “US tech” market is exposure to Samsung and Tencent for example.

An even more drastic example of the value foreign technology stocks can bring to the table is displayed by the CQQQ (aka the Guggenheim China Technology ETF). 27.69% of this ETF is geographically located in China, 58.54% from Hong Kong, and 13.77% from the USA. TravelSky Technology and Semiconductor Manufacturing International are some example holdings. Over the same time periods as above, China tech has outperformed US tech by a blowout margin, 2,600 bps and 5,000 bps over the 6 month and 5 year time period.

Now that we know there is value in gaining exposure to international products and significant alpha to be captured, there is one last question to be asked. Is there still room to run?

A common valuation metric is the PEG ratio, or price relative to earnings growth. This is commonly used by investors to put price into context. The Chinese / Hong Kong tech market is trading at 35x earnings now (per the Guggenheim CQQQ ETF) and analysis are currently expecting these stocks to grow EPS 45% on average. As of now, according to recent data, the ETF is attractively priced considering the estimated growth opportunity (or a PEG of .777).

Overall, the Hong Kong technology market is a booming sector. Investor appetite for risk shouldn’t only be limited to one’s country of origin, but to the greater world markets. Foreign equities can provide much needed alpha in a difficult macro environment where explosive growth is rare, but keep in mind earnings growth estimates are just that, estimates.