Investors are unlikely to see a significant disparity between large-cap and small-cap shares after cross-border stock trading starts, UBS Securities said Thursday.
The scheme, which allows the Hong Kong and Shanghai exchanges to trade each other’s stocks, is set to begin in October.
“The investor mixes of the two cities are different. Hong Kong is dominated by large institutional investors while the mainland market is dominated by retail investors,” UBS Securities H share analyst Lu Wenjie said.
“The stock link may narrow the price gap between large-cap and small-cap shares but institutional investors won’t invest in small-cap shares because of the stock connect,” Lu said.
UBS chief China equity strategist Chen Li said MSCI, a global equity index, will include A shares in its China and emerging markets indices soon after the stock link.
“The main reason MSCI did not include A shares is that offshore investors felt the mainland market is still too limited for outsiders.”
However, global investors will have abundant investment access to the Chinese market as the government expands the quotas for the qualified foreign institutional investor scheme and its yuan-denominated equivalent, plus the stock through train to as much as 900 billion yuan (US$146.6 billion), Chen said.
“Global investors will have strong interest in blue-chip companies given attractive valuation levels, although they have shown a moderation in earnings growth,” Chen said.
He said A shares will have an upside potential of 5 percent until the end of the year.
Chen dismissed the idea that the market has exaggerated the stock through train. He said reform of state enterprises will continue to support H shares in the coming months.
More than HK$100 billion of capital flowed into Hong Kong in the past two months as investors ramped up their H-share holding on expectations of further economic stimulus by Beijing, Chen said.
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