Hong Kong’s stock market has become a battleground for mainland Chinese retail investors and global institutional investors.
They have been taking a mainland view on Hong Kong shares while looking at A shares from a foreign perspective.
At present, the mainland market has daily turnover of more than 1 trillion yuan (US$161.3 billion) compared with Hong Kong’s HK$100 billion (US$12.9 billion).
That means the Hong Kong market will be increasingly impacted by A shares given rapid liquidity flows.
Big caps such as banking stocks have a price-earnings ratio of five to 10 times while smaller plays on Shenzhen’s Growth Enterprise Board have a P/E above 100 times.
That reflects the preferences of mainland investors.
They favor small and medium stocks which offer growth potential and ample room for imagination.
As more mainland capital flows into Hong Kong, a similar sentiment will drive Hong Kong shares as well.
Stocks that used to be ignored by domestic investors might be revalued.
Most investors like internet technology stocks. A number of mobile and telecom counters are set to post rapid earnings growth this year and in 2016 as China’s 4G market heats up.
Also, Hong Kong-listed environmental protection, healthcare and retail stocks are 50 percent cheaper than their counterparts in the mainland.
These stocks will see a huge catch-up effort as mainland investors pile into the Hong Kong market.
The market is closely watching whether A shares will be included in the MSCI Emerging Markets Index in its annual review on June 10.
The index is the most used benchmark among global fund managers. More than US$9.5 trillion worth of shares are linked to MSCI indices.
If the inclusion comes to pass, millions will flood into A shares.
What stocks will foreign investors pick? Obviously, they would prefer blue chips with a P/E ratio of eight to 10 times.
A number of leading players have emerged in various sectors after nearly four decades of opening up by China.
However, these blue chips are not being embraced by mainland investors.
For example, Haier Electronics Group (01169.HK) has a P/E ratio of 20 times while Gree Electric Appliances Inc. (000651.CN) has 13 times P/E.
Inner Mongolia Yili Industrial Group (600887.CN), a leading dairy company, has a P/E ratio of 20 times, up to 20 percent cheaper than China Mengniu Dairy (02319.HK).
A shares may need to wait another six to 12 months to join MSCI.
Investors should buy stocks that are attractive to foreign investors in advance, but the key is fundamentals.
Stocks without fundamental support may not fare well in the long run.
This article appeared in the Hong Kong Economic Journal on June 3.
Translation by Julie Zhu
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