28 October 2016
Investors have rushed to buy cheap dual-listed shares and quality stocks not available on the mainland. Photo: Reuters
Investors have rushed to buy cheap dual-listed shares and quality stocks not available on the mainland. Photo: Reuters

Finding high-return, low-risk investment opportunities

It’s not unusual to find investments with high risk but low return amid an increasingly volatile environment. HSBC Holdings (00005.HK) slumped to HK$33 in March 2009 following the financial crisis in October 2008.

Investors should capture bottom-fishing opportunities as most foreign investors have fled the China market for lack of faith in its economic growth outlook.

The A-share market has continued to be the best-performing market in the first quarter this year after posting whopping gains in the second half of last year. The Shenzhen and Shanghai benchmarks have soared 38.6 percent and 15.9 percent respectively. Hong Kong has lagged behind.

The China Securities Regulatory Commission (CSRC), the nation’s top securities regulator, has given the nod for the nation’s mutual funds to invest in H shares, the latest move to boost the Hong Kong market in the medium term. In the past, mainland mutual funds had to apply for quota under the Qualified Domestic Institutional Investor program to be able to invest overseas.

Under the new rules, existing mutual funds have to inform their clients and obtain approval from the CSRC before participating in the scheme. The process could take a couple of weeks.

Newly established funds, on the other hand, have to raise funds before going through the same procedure, which could take even longer.

Nevertheless, many investors just rushed to buy some cheap dual-listed shares and quality stocks unavailable on the mainland, such as Tencent Holdings (00700.HK), Hong Kong Exchanges and Clearing (00388.HK), AIA Group (01299.HK) and CKH Holdings (00001.HK), as well as industrial plays like Techtronic Industries (00669.HK) that posted good earnings and pay high dividends.

But the timing is not good yet for buying Macau gaming stocks such as Galaxy Entertainment Group (00027.HK).

Over the past year, H shares have lagged behind their A-share counterparts. Meanwhile, the Shanghai-Hong Kong Stock Connect has been dominated by northbound trading.

As such, the CSRC’s move allowing mainland mutual funds to buy H shares is expected to serve as an impetus to the local market.

Mutual funds usually look at fundamentals, and mainland pension funds and insurance funds will also be allowed to buy H shares. That could help narrow the price gap between A shares and H shares. And that in turn could feed into a cycle of driving up A shares further and bringing up H shares subsequently.

Foreign funds will return to the mainland and Hong Kong markets sooner or later. That explains why more than 40 countries have joined the China-backed Asia Infrastructure Investment Bank.

China’s One Belt, One Road strategy has attracted massive interest in China Railway Group (00390.HK), China Railway Construction (01186.HK), Metallurgical Corp. of China (01618.HK), China Shipping Container Lines (02866.HK) and Guangzhou Shipyard International (00317.HK).

Green energy plays like BYD Co. (01211.HK) and airline stocks also benefit from declining oil prices and the booming tourism market.

However, investors should never buy any stock at peak level, or they will suffer if they fail to take profit quickly. Investment strategy and execution have to come in tandem with each other.

This article first appeared in the Hong Kong Economic Journal on April 2.

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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