28 October 2016
A man watches a monitor in a Hong Kong brokerage on Thursday, a day after turnover on the exchange set a record. Photo: Bloomberg
A man watches a monitor in a Hong Kong brokerage on Thursday, a day after turnover on the exchange set a record. Photo: Bloomberg

Shares of red chips, Chinese firms to stay strong in short term

Chinese investors should draw lessons from history.

Over the last two decades, the government’s hand has always been behind each up and down in China’s stock markets.

The government would intervene once, twice and even more times when the equity markets melted down.

And the state-run media would keep applauding a bull market.

There are two types of investors worldwide — rational and irrational ones.

And irrational investors are always the same in any market.

Undoubtedly, China needs a powerful capital market, and the wealth creation effect that is emerging is really important.

However, the capital market has to proceed in tandem with the real economy.

The real economy is now facing substantial downward pressure, and companies are also grappling with the slowdown in economic growth.

Therefore, the bull market isn’t underpinned by a solid real economy.

Investors will have to judge the fundamentals on their own.

H shares still lag behind A shares, and there is still medium- and long-term value.

But investors should be wary of the risk of a short-term correction in A shares.

In the past, experts always suggested investors should watch the global economy, mainland economic growth and US monetary policy when they considered investing in Hong Kong shares.

But these rules have gone out of style over the past month.

H-share investors do not need to look any of these factors, since if they buy the stocks that are being chased by mainland investors, they can easily reap a profit.

Massive mainland capital has been flowing into Hong Kong, so investors should bet on stocks that are favored by their mainland peers.

Beijing has given the nod for mainland mutual funds to access the Hong Kong market in light of the whopping gains in mainland equity markets.

The move has had immediate impact. The Hang Seng Index jumped 961 points on April 8, the largest single-day rally in three-and-a-half years.

And the Hang Seng China Enterprise Index surged 733 points on that day, outperforming the benchmark index in percentage terms.

Up to 85 percent of the top 20 actively traded stocks in Hong Kong are mainland Chinese companies or related stocks.

Of these, Tencent Holdings (00700.HK) rallied 3 percent to a record high, and its market capitalization has come close to HK$1.5 trillion (US$190 billion).

Meanwhile, turnover on the main board hit a record high of HK$250 billion, equivalent to HK$12.63 million each second. That beats even the market during its heyday back in 1997.

And the southbound flows in Stock Connect used up the daily quota of 10.5 billion yuan (US$1.69 billion) for the first time, showing the huge amount of money flooding into the Hong Kong market.

Mainland capital will hold sway in H shares in the next six months, and mainland companies will be the most sought after.

That could open a new chapter in the Hong Kong market.

It may seem to be odd that H shares are only becoming hot five months after Shanghai-Hong Kong Stock Connect kicked off.

That is linked to Beijing’s decision to allow mainland mutual funds without a qualified domestic institutional investor quota to buy H shares through Stock Connect.

That will open the door for trillions of yuan of cash from those mutual funds to flood into Hong Kong market.

Stock Connect continues to draw more capital into Hong Kong, while there have been net fund outflows in northbound trading for four straight days. Capital flows have reversed their direction.

Hong Kong Exchanges and Clearing (00388.HK) has become one of the biggest beneficiaries, its market capitalization swelling to a high of HK$290.9 billion, making it the world’s largest exchange by market value.

Global fund managers have finally come to a consensus that A shares are entering a bull market, which will ripple into H shares through Stock Connect.

So investors should capitalize on sectors favored by mainland investors.

This article appeared in the Hong Kong Economic Journal on April 13.

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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