19 April 2019
Following the rally last year in China's markets, some H-shares in Hong Kong have become cheaper compared to their A-share counterparts in the mainland.
Following the rally last year in China's markets, some H-shares in Hong Kong have become cheaper compared to their A-share counterparts in the mainland.

Where to place your bets amid the A-shares/MSCI talk

The inclusion of China’s A-shares into the MSCI index has become a hot topic again recently.

A recent survey of foreign funds shows that a majority of them are against the inclusion. However, Goldman Sachs analysts have noted that the Shanghai-Hong Kong Stock Connect program and the upcoming Shenzhen-Hong Kong stock link might be a catalyst for the inclusion.

That being said, MSCI may consider including A shares probably this year or more likely in 2016.

The launch of the Shanghai-Hong Kong Stock Connect has once been considered as an incentive for including A-shares into MSCI. However, the mutual market access has yet to mature, in terms of capital flow. 

The Eurozone and Japan, meanwhile, continue to pump more money into their markets, while China’s economic restructuring has yet to bear any fruit. 

A strong US dollar has weighed on both H- and A-shares recently, and foreign investors have kept selling the Hong Kong-traded H-shares.

If the selling continues, the inclusion of A-shares into the MSCI may not take place this year.

A-shares have posted sharp gains in the past six months, and foreign investors have been chasing mainland banks, insurance and telecom plays. As a result, related dual-listed stocks have seen the H-shares become cheaper than A-shares, compared with an opposite situation before.

The share prices moves suggest that foreign investors may not buy into the conviction that the A-share market is becoming more globalized. Also, the A-share ETFs have been outperforming both the Hang Seng Index and the Hang Seng China Enterprises Index, which indicates that foreign investors have little interest in holding shares on both markets.

An inclusion of A-shares into the MSCI will be a sign that foreign investors are bullish on mainland market in the medium term. Investors can wait for a good timing after China’s economic reform yields some fruit, and external monetary easing and strong US dollar are no longer major factors.

Foreign investors should buy into H-shares first given the price discount in dual-listed stocks. Therefore, it may be a good idea to keep holding or accumulating those stocks. In the short term, investors should look for policy-driven plays such as mainland insurers and banks. 

Given the circumstances, Hong Kong investors should place small bets on A-shares under the stock connect scheme, while conservative investors may look at some A-share ETFs such as ChinaAMC CSI 300 Index (03188.HK) and X Ishares A50 (02822.HK).

Currently, policy-driven sectors are the most attractive. However, most HK-listed mainland companies are in the “old economy” basket, except Tencent Holdings (00700.HK) and companies affiliated with Alibaba.

Among the so-called old economy segments, investors should pay attention to state-owned enterprises with mergers & acquisitions potential, free-trade-zone theme stocks including logistics and telecom plays.

And in the manufacturing space, raw materials and products in the new energy sector also look attractive, although there are fewer choices in Hong Kong than in the mainland market.

This article appeared in the Hong Kong Economic Journal on March 17.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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