The Hang Seng Index (HSI) may reach the historic high of 32,000 over the medium to long term because of continuing liquidity inflows from the mainland and the low valuations of H shares, asset management firm Invesco said Tuesday.
“Overall we are confident on the Hong Kong broad market … Liquidity from the mainland has just started to come, and the newly launched funds have not begun buying Hong Kong stocks yet,” said Paul Chan, the firm’s chief investment officer for Asia ex-Japan.
“Other markets have reached new highs. It’s not a big problem for us to reach new high,” he said.
Chan expects H shares to reach parity with A shares over the long term.
The Hong Kong stock market has entered a bull phase after the Easter holidays following an announcement by mainland authorities that mainland fund houses will be allowed to invest in Hong Kong stocks through the Shanghai-Hong Kong Stock Connect program.
But Chan said the sharp rally in the past few days was not driven by mutual funds in the mainland, as they need time to amend their rules before they can invest in Hong Kong.
“Mutual funds will not come so quickly. The Stock Connect quota accounts for only a small portion of the turnover … I think that some hot money from the mainland, or even private funds, has already come to Hong Kong,” he said.
Capital outflows from the Hong Kong market are not likely at the moment, although they could occur if the sentiment of retail investors in the mainland changes, he said.
“We have seen a rally of only four days, and today is the correction,” he said.
The HSI dropped 454 points, or 1.62 percent to 27,561 points Tuesday, ending a rally that began Wednesday last week.
Turnover was HK$237.5 billion.
The Hang Seng China Enterprise Index, the main gauge of H shares, shed 325 points, or 2.2 percent, to 14,264 points.
Ken Hu, chief investment officer for fixed income, Asia Pacific, at Invesco, said it is difficult to say whether the International Monetary Fund will include the renminbi in its special drawing rights when it reviews the currency basket in October.
“The US has the veto right. It is not an economic analysis; it’s a political [decision],” Hu said.
China is likely to cut its benchmark lending rate by 200 basis points (2 percentage points) to 3.35 percent in the next 12 months, because borrowing costs for firms is too high, he said.
The People’s Bank of China is also expected to slash the reserve requirement ratio for banks by 400 basis points, Hu said.
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