Date
10 December 2016
With the Shenzhen-Hong Kong stock link starting in about a week, H shares trading at deep discounts to their A-share counterparts could be good investment targets. Photo: HKEJ
With the Shenzhen-Hong Kong stock link starting in about a week, H shares trading at deep discounts to their A-share counterparts could be good investment targets. Photo: HKEJ

Shenzhen-HK stock link: Southbound flows may dominate initially

As political uncertainties in Europe persist, funds are expected to keep flowing out from the region into US equities and other US dollar assets.

Among major events, Italy will hold a constitutional referendum this weekend while both Germany and France will have elections very soon. UK will launch the Brexit process in March next year.

US equities should therefore form a key part of investors’ portfolios.

Shenzhen-Hong Kong Stock Connect will officially start on Dec. 5.

At the moment, concerns over renminbi devaluation and high valuation of most Shenzhen shares with a high growth potential may discourage northbound investments through the link.

By contrast, deep discounts of H shares against their A-share counterparts would be quite attractive to Chinese investors.

Among these shares, Anyang Steel Co. (00347.HK), ZTE Corp (00763.HK), Zhejiang Shibao Co. (01057.HK), Zoomlion Heavy Industry Science and Technology Co. Ltd. (01157.HK), BYD Co. (01211.HK), Shandong Chenming Paper Holdings Ltd. (01812.HK) and Xinjiang Goldwind Science & Technology Co. (02208.HK) have outperformed the broader market lately.

Some smaller cap stocks also witnessed active trading recently, such as Li Ning Co. (02331.HK), Kingdee International Software Group Co. (00268.HK), Huadian Fuxin Energy Corp. (00816.HK) and Tongda Group Holdings (00698.HK).

It’s too early to judge how the Shenzhen stock link will improve market sentiment.

I believe US stocks will continue to outperform mainland and Hong Kong equities in the near term but the situation may reverse by mid-2017.

For the Hong Kong market, historical pattern shows the China Enterprise Index typically outperformed the Hang Seng Index in the last two months of the year.

In November, the Hang Seng Index has stayed put while the China Enterprise Index has gained 3.73 percent as Chinese financial stocks and commodity counters have risen.

The same trend may continue next month.

This article appeared in the Hong Kong Economic Journal on Nov. 29

Translation by Julie Zhu

[Chinese version 中文版]

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 RT/RA

columnist at the Hong Kong Economic Journal

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