Hang Seng Index Company: Attractive Yield and Valuation, Banking Stocks Outperforming the Market

According to Dolphin Research, on September 20th, the Hang Seng Index Company pointed out in its index update that the Chinese mainland has implemented a series of policies to support the economy since August. These measures cover various aspects, including fiscal, monetary, housing, and capital market measures. On September 15th, the People's Bank of China lowered the reserve requirement ratio (RRR) for financial institutions by 0.25 percentage points, reducing the weighted average RRR from 7.6% to 7.4%. This RRR cut is expected to release over 500 billion yuan of medium- to long-term liquidity, marking the second RRR cut since March this year. By releasing more deposits, the RRR cut can effectively enhance the lending capacity of banks, which is beneficial for domestic bank stocks. In fact, credit expansion in the Chinese mainland also occurred in August. New RMB loans in August reached 1.36 trillion yuan, far exceeding the 345.9 billion yuan in July, while the increment of social financing scale in August was 3.12 trillion yuan, also significantly higher than the 528.2 billion yuan in July. This is a positive signal for domestic bank stocks.

The Hang Seng Stock Connect China Mainland Banks Index reflects the performance of mainland bank stocks listed in Hong Kong and tradable through the Stock Connect. As of September 19th, the total return of this index in September was 4.3%, higher than the 0.9% decline of the Hang Seng Composite Index, which represents the overall market. The Hang Seng Stock Connect China Mainland Banks Index was launched in February 2017 and currently consists of 12 constituents. Not only has this bank index outperformed the market this year, but its long-term performance has also been outstanding. Over the past three years, the cumulative total return of the Hang Seng Stock Connect China Mainland Banks Index has reached 19.9%, with an annualized total return of 6.2% and an annualized volatility of only 20%. In contrast, the Hang Seng Composite Index has fallen by 22.4% in the same period, with an annualized decline of 8.1% and a volatility of over 25%. It is worth noting that bank stocks are known for their higher dividend yield and lower valuation. As of September 19th, 2023, the historical dividend yield of the Hang Seng Stock Connect China Mainland Banks Index is as high as 8.4%, while the price-earnings ratio is only 3.4 times.