18 October 2018
China's A shares have handily outperformed their Hong Kong-listed counterparts. Photo: Bloomberg
China's A shares have handily outperformed their Hong Kong-listed counterparts. Photo: Bloomberg

BlackRock prefers H shares as China stocks turn ‘frothy’

Chinese firms trading in Hong Kong offer better value than their onshore peers amid signs China’s domestic market has become overheated after a world-beating rally, BlackRock Inc. said.

The world’s biggest asset manager prefers the cheaper Hong Kong-listed H shares, especially those of small and medium-sized firms, Bloomberg reported.

Stocks benefiting from domestic demand in the mainland and the country’s structural reforms will be winners, while the yuan-denominated A shares, which have more than doubled over the past year to the highest level since 2008, appear “frothy,” the New York-based investment firm said in a report Monday.

Chinese stocks have advanced as the government eases monetary policy to revive growth and implements reforms to rebalance the economy by focusing on consumption instead of investment.

While the benchmark gauge for H shares also rose to a seven-year high as the mainland rally spread to Hong Kong, the valuation premium for onshore companies over their dual-listed offshore peers has widened to 40 percent from 2 percent in mid-November when the Shanghai and Hong Kong stock exchanges were linked.

“We see value in H shares of selected banks, property developers, utilities and new energy,” BlackRock analysts led by Jean Boivin wrote.

“This is not a buy-and-hold market. It’s about rapid sector and stock rotation. Consumption is likely to grow faster than GDP as China rebalances.”

The Finance Ministry cut import taxes by half on consumer products — including clothing, cosmetics and baby items – this month to lure Chinese to spend more at home rather than abroad.

Gross domestic product is projected to expand this year at the slowest pace since 1990.

The Shanghai Composite Index has surged 153 percent over the past 12 months, the best performance among major global equity markets.

Companies on the underperforming Hong Kong index are trading at about 10 times forward profit on average, compared with a multiple of 19 for the Shanghai index, the highest since 2009.

The premium on smaller companies over large-cap stocks is narrower in Hong Kong than in the mainland, partly because there is less liquidity in the offshore market, BlackRock said.

That will change as the integration between the two markets deepens, the firm said.

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