Hong Kong’s stock market is increasingly being driven by short- to mid-term speculative activity, rather than value investing.
It is because the HSI constituents that have local business exposure have been falling in number, while the ranks of firms that have international or mainland businesses have been swelling.
Entities that have huge global exposure are affected more by market operations of foreign funds, while mainland-related shares are led by China’s national policy changes.
The structural shift prompts speculators to make their investment decisions mainly from global macro economic and political moves, rather than fundamental analysis of value investment.
In addition, it has become increasingly difficult to make macro analysis as more central banks have intervened in the market and as a growing number of nations have resorted to financial policies for self protection. And China’s policy is even harder to predict.
The high-profile Shanghai-Hong Kong Stock Connect has so far primarily attracted foreign capital into mainland markets. Therefore, investors may step up direct investment in A shares, rather than in H shares, to capture the China growth. This means that the Hong Kong-traded H shares would have limited upside.
Long-term investors should return to the old track and focus more on studying company fundamentals, such as management quality, industry outlook and operational performance.
Investors should buy mainland plays in the insurance, banking, brokerage, high-speed railway, infrastructure, and airline sectors. The can also look for some stocks that have attractive valuations and have the potential to gain from new policy incentives next year.
For example, firms that are exposed to state-owned enterprise reform, healthcare sector, new energy vehicles and e-commerce. One should also look at firms that can benefit from new free-trade zones in Tianjin, Fujian and Guangdong, and private capital investment in highways.
Bullish fans Jefferies are also upbeat about the prospect of Chinese coal and steel plays. Its analysts have projected an increase of over 30 percent for both A shares and the Hang Seng China Enterprises Index for next year.
Currently, the Shanghai Composite Index is hovering around the 2,900-points mark after recovering from a multi-year low. Now, Beijing faces the big challenge of utilizing the bullish equity market sentiment to lure more capital away from the property sector and shadow banking.
Also, many foreign institutional investors remain on the sidelines due to compliance and legal ownership issues. That will change only with time when there are more reforms.
That said, the mainland markets will be helped next year as more A-share exchange-traded funds are likely to come on board.
This article appeared in the Hong Kong Economic Journal on Dec. 15.
Translation by Julie Zhu
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