24 February 2019
The impact of the Stock Connect program on Hong Kong equities is just beginning to be felt. Photo: Bloomberg
The impact of the Stock Connect program on Hong Kong equities is just beginning to be felt. Photo: Bloomberg

HK equities: Go for mid-cap industry leaders

I made a trip to a Chinese manufacturer recently. Interestingly, the mid-cap company has attracted more than 40 fund managers, 80 percent of which are from mainland China.

Some might think the Stock Connect program with Shanghai and Shenzhen may have seen its full impact on Hong Kong equities already.

But after talking with mainland fund managers during the factory tour, I think this may just be the beginning.

I think the Hong Kong market is set to be dominated by mainland capital sooner or later.

Lots of mainland investors are interested in Hong Kong shares but they have not made any aggressive move yet.

Contrary to the usual impression, mainland funds are subject to rather stringent risk control measures.

One mainland fund manager said that according to his firm’s rule, he must cut loss if a certain stock in his portfolio has dropped more than 10 percent from the purchase cost. And a fund manager is required to write a lengthy report to explain the loss.

As a result, most mainland investors would shun stocks with thin liquidity and instead prefer stocks that they can easily unload if needed.

Mainland buyers also prefer mid-sized counters that are leaders in their own sector.

Man Wah Holdings Ltd. (01999.HK) is a typical example.

The stock has posted dramatic price gains, but the valuation remains attractive compared with its mainland-listed peers.

I believe mid-cap firms with high liquidity and sound fundamentals have a very bright future.

I have increased my holding of Hong Kong equities in recent months, given my expectation of further massive capital inflow from the mainland.

Regarding stock picking, I’ve adopted a simple strategy – collect mid-caps that are industry leaders.

Judging by the strong rally of liquor stocks, amid a lackluster performance of the broader market on the mainland, we can see how selective Chinese fund managers are and how strong their demand is for quality assets.

This article appeared in the Hong Kong Economic Journal on April 21

Translation by Julie Zhu

[Chinese version 中文版]

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Director, Asset Management at Ample Capital Limited.

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