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Hong Kong’s economy is now in a technical recession. GDP has declined for two straight quarters, and if things continue to go the way they are, the city might be headed towards an actual recession. After growing 3% in 2018, Hong Kong’s government expects its economy to grow for the year between 0-1%.
Hong Kong’s economy has slowed due to trade tensions between China and the US and, most significantly, on the back of its anti-government protests. Due to the protests, tourism numbers in the city have plunged.
Although Hong Kong unveiled a US$2.4 billion stimulus package in August as a response, many economists are not sure if Hong Kong’s economy will turn around soon given the uncertainty surrounding any resolution to the protests.
Stocks to consider in recession
So with that in mind here are three companies to consider in case Hong Kong’s economy enters a recession. First off, there’s Ping An Insurance Group Co (SEHK: 2318) with low exposure to Hong Kong and more exposure to China – meaning it could be worth a closer look. Although China’s economy is slowing, it’s still growing much faster than Hong Kong’s.
Then there are essential utilities, whose demand won’t change that much during recessions, such as CLP Holdings (SEHK: 2) and Power Assets Holdings Ltd (SEHK: 6); both of which I believe offer investors shelter amid any recessionary risk.
Ping An Insurance
Ping An Insurance is one of China’s largest insurance and financial tech companies. For the first half of 2019, Ping An’s net profit rose 68.1% year-on-year to RMB 97.6 billion (US$13.8 billion). The company’s interim dividend per share rose 21% to RMB 0.75.
Due to its large size, Ping An doesn’t have as much exposure to Hong Kong as it does to China. As of June 30, 2019, Ping An had 196 million retail financial customers, versus Hong Kong’s population of just 7.4 million. The company also has a minimal retail presence in the city.
Ping An could be a good investment because it’s currently riding the secular growth trend of financial technology. Not only does Ping An sell insurance policies but its subsidiaries also facilitate loans and are involved in wealth management too.
The company is also heavily into research and development. Ping An has around 32,000 R&D employees and the company has invested heavily in future growth areas such as health tech, AI, smart cities, and even cloud computing – fashioning itself not only as an insurance company but as a technology company too.
CLP Holdings’ vertically-integrated electricity supply business provides electricity to around 80% of Hong Kong’s residents. Given how essential electricity is, CLP’s power demand from the city doesn’t change very much.
CLP’s performance has been exceptionally steady. Operating earnings have increased every year from HK$10.1 billion (US$1.28 billion) in 2014 to HK$14 billion in 2018. The company’s dividends have also increased every year from 2014 to 2018.
Over the years, CLP Holdings has expanded in the Asia-Pacific region. Due to its ex-Hong Kong investments in Australia in particular, the company’s operating earnings have increasingly come from outside of Hong Kong, offering investors valuable diversification.
Power Assets Holdings
Power Assets owns roughly a third of HK Electric Investments Ltd (SEHK: 2638), which provides electricity to around half a million people in Hong Kong. The company also has a global presence outside of Hong Kong, ranging from interests in oil and gas networks in Australia to thermal generation plants in China and electricity networks in the UK.
Power Assets is more geographically diversified than CLP. Whereas CLP derived most of its operating earnings from Hong Kong in 2018, Power Assets derived only 14% of its profit contribution (by reportable business segment) from the territory.
Due to China’s slowing economy and the social protests, Hong Kong’s economy might be heading towards a recession. Under these conditions, stocks such as Ping An that don’t have as much exposure to Hong Kong and that ride secular growth trends are better positioned than most.
Meanwhile, utilities – where demand won’t fall much if the city’s economy contracts – are also worth further research for investors.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.