23 January 2019
The expansion of the stock connect scheme means Shenzhen index funds may continue to outperform their peers in Shanghai. Photo: Bloomberg
The expansion of the stock connect scheme means Shenzhen index funds may continue to outperform their peers in Shanghai. Photo: Bloomberg

Finding opportunities in Shenzhen-HK Stock Connect

The key issue this year is that oil prices have slumped 60 percent since the second half of last year. This has eased global inflation pressure and paved the way for rate cuts by several major central banks in Asia including those in India, China, Thailand and South Korea.

With no imminent threat of inflation and with the risk of deflation emerging in certain countries, central banks in nations like Japan and Europe have to rely on quantitative easing to stimulate growth.

Rate cuts and other monetary easing measures have had an immediate impact on stock markets. US Federal Reserve chairwoman Janet Yellen is wisely trying to delay an interest rate hike in a bid to avert any policy risk. As a result, most equity markets have posted gains in the first three months of this year, offering a good hunting ground for investors.

However, there are also exceptions. Latin American shares, US financial stocks and the Japan Mother Index have dropped 8.5 percent, 0.2 percent and 3.1 percent respectively.

In US dollar terms, some of the best performing stocks can be found in Nasdaq’s biotech index, which has soared 17.2 percent so far this year.

Meanwhile, the German market rallied 13 percent after subtracting euro loss, and Japanese market rose by 13 percent as well.

The Russian market has risen over 16 percent combined with currency gains. Argentina and Venezuela markets have climbed 32.7 percent and 24.3 percent respectively.

The US dollar has jumped 27 percent in last 12 months and appears to be taking a breather. The oil price has first rebounded 23 percent since late January but then dived again to US$42.03 per barrel.

The euro has been widely expected to fall below 1 against the greenback after touching a low of 1.05. Some have forecasted another 13 percent drop for the euro in 2017.

However, things have just gone in the opposite direction. The euro has bounced back to 1.1 from the previous 1.05. If the euro can break the resistance level of 1.123, it might go further to 1.15 or even 1.2. If so, investors could buy or hedge some European stocks or funds when the euro returns to 1.2.

Since the launch of Shanghai-Hong Kong Stock Connect, COSP A50 ETF and Huaxia China Stock 300 ETF have witnessed swelling trading volumes and rising prices. The Shanghai Composite Index has rallied 78.8 percent in the last 12 months and 14.1 percent so far this year. The benchmark index has soared over 50 percent in the second half of 2014 alone.

The Shenzhen-Hong Kong Stock Link is expected to kick off in October. The Shenzhen stock index has also jumped 77.8 percent in the last 12 months and beats the Shanghai market with a year-to-date rally of 36 percent.

China Merchants SZSE TMT50 Total Return Index ETF is the best-performing A-share index fund with a sharp rally of 50.37 percent. The Guangfa SZSE SEM300 Fund ETF also jumped 43.1 percent, far exceeding the 14.09 percent gain posted by Huaxia China Stock 300 ETF.

The expansion of the stock connect scheme would further benefit the Shenzhen market, which means Shenzhen index funds may continue to outperform their peers in Shanghai.

Meanwhile, the investment flow will continue to focus on north-bound trading. Hong Kong and foreign investors may enjoy the spiraling uptrend of A shares, which are clearly supported by the central government and regulators.

This article appeared in the Hong Kong Economic Journal on March 26.

Translation by Julie Zhu

[Chinese version 中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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