Citi: Expects a 2.25% rate cut in the US in the next 12 months, Hong Kong utility stocks expected to undergo a valuation reassessment
Citigroup predicts that the Federal Reserve will cut interest rates by 2.25% in the next 12 months, leading to a decrease in the yield of the U.S. 10-year Treasury bond to 3% or lower. Citigroup has raised the target prices for 5 Hong Kong utilities stocks, expecting a revaluation due to the rate cut. The dividends of Hong Kong utilities stocks have generally not been reduced and are defensive. Citigroup's preferences for Hong Kong utilities stocks are, in order, CK Infrastructure Holdings, Power Assets Holdings, CLP Holdings, Hongkong Electric, and Towngas
According to the latest information from Zhitong Finance and Economics APP, the market generally expects the Federal Reserve to start an interest rate cut cycle in September. Citigroup stated that since 1998, the stock price performance of Hong Kong utilities has a high correlation of 55% to 83% with the yield of the U.S. ten-year Treasury bond. Citigroup expects the Federal Reserve to cut interest rates by 2.25% in the next 12 months, which could lead to the yield of the U.S. ten-year Treasury bond dropping from the current 3.93% to 3% or lower. Therefore, Citigroup maintains a positive view on 5 Hong Kong utilities and raises their target price by 2.6% to 24%, anticipating a revaluation due to the interest rate cut.
Citigroup mentioned that the yield of the U.S. ten-year bond was around 3% in December 2010, June 2011, December 2013, November 2018, and June 2022. At that time, the dividend yield of Hong Kong utilities ranged from 3% to 4.7%, while currently, the dividend yield of utilities ranges from 4.5% to 5.9%, representing an increase of 17% to 78% compared to historical levels.
Citigroup pointed out that most of the profits of Hong Kong utilities come from regulated returns, indicating defensive profitability. Moreover, dividends are generally not cut, so they have been considered high-quality income stocks for decades. Citigroup's preference for Hong Kong utilities is as follows: (1) Cheung Kong Infrastructure (01038), with merger potential and greater contribution from electricity; (2) Power Assets (00006), with merger potential; (3) CLP Holdings (00002), turning losses in Australian business and larger market value; (4) HK Electric Investments (02638), guaranteed returns under the Hong Kong regulatory plan; (5) Towngas China (00003)