27 March 2019
Stock Connect will give rise to plenty of investment opportunities, says Guotai Junan Securities chairman and CEO Yim Fung. Photo: HKEJ
Stock Connect will give rise to plenty of investment opportunities, says Guotai Junan Securities chairman and CEO Yim Fung. Photo: HKEJ

Sectors that we should bet on in the Stock Connect era

The Shanghai-Hong Kong Stock Connect has a huge impact on the market despite limited amount of actual capital movement. The scheme has opened the door for mutual access for investors, which will pave the way for unleashing “dividends of reform”.

The milestone step will trigger a shake-up and revaluation in capital markets. The historical significance is equivalent to China’s WTO entry.

The Stock Connect program will foster the world’s second-largest equity market and beef up its attractiveness for global investors. The scheme will enable investors to access both A and H shares and expand the investor base for both markets.

Also, the stock linkage will cement the status of Shanghai and Hong Kong as global financial centers. As of late 2014, the combined market capitalization of Shanghai and Hong Kong totaled US$7.17 trillion.

An exchange that offers such scale, mutual access and openness will be attractive for global asset management, investment management and wealth management businesses given the width, depth, stability, liquidity and growth potential in the market.

The Stock Connect will also assist Beijing’s efforts in internationalizing the renminbi and strengthen Hong Kong’s role as an offshore renminbi hub.

The scheme will help trigger massive transformation in mainland financial markets just as how WTO entry pushed the reform of Chinese enterprises. The Stock Connect will accelerate the pace interest rate and exchange rate reforms. Monopoly operations and channels will get squeezed, and the structure of market participants will also evolve. Corporates and investors will benefit from “dividends of reform”.

There are various sectors that should offer attractive opportunities for investors.

1. Investors could bet on bluechip firms that have core business in the mainland and actively utilize financing and debt issuances on both markets.

2. Place bets on small-cap H shares and A-H shares. Investors should also look into valuation gaps at the Shenzhen Stock Exchange ahead of the Shenzhen-Hong Kong Stock Connect.

3. Non-banking financial plays like brokerages, funds, insurance and trust firms which will benefit from financial reform and Asset-Backed Securitization.

4. High-speed railway, infrastructure, shipping, transport, and infrastructure under the theme of “One Belt, One Road”.

5. Investors should include some private-owned and small enterprises that offer vast growth potential. High-tech manufacturing, biotech, new energy and environmental protection technology sectors also look attractive.

6. The trend of urbanization and aging population should encourage more investment in IT, mobile internet, healthcare, banking, brokerage and insurance plays.

7. Mobile communication, internet, e-commerce, e-payment, electronic products, auto, aerospace, tourism, entertainment, sports consumption will benefit from consumption upgrade.

To capture the globalization drive of Chinese enterprises, place bets on leading players in banking, brokerage, high-speed railway, nuclear power, machinery manufacturing, telecoms and e-commerce industries.

This article appeared in the Hong Kong Economic Journal on Jan. 28.

Translation by Julie Zhu

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Chairman and Chief Executive of Guotai Junan International Holdings; Vice Chairman of Chinese Financial Association of Hong Kong

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