As HK echoes China rout, stocks become too cheap to ignore

July 10, 2015 08:32
New World Development, which built the K11 Art Mall in Shanghai, is one of nearly half the firms that make up the Hang Seng Index trading below book value. Photo: Bloomberg

As Hong Kong mirrors China's stock plunge, some investors are focusing on the markets’ differences, Bloomberg reported.

After a record surge in volatility on Wednesday, in which it dived the most since the global financial crisis, the Hang Seng Index (HSI) rebounded Thursday to its biggest gain in three months.

As the benchmark nears its cheapest level against global shares in more than a decade, Valkyria Kapital Ltd. is buying companies it says have been unfairly sucked into the sell-off that originated in the mainland.

Nearly half the firms making up the index, including companies ranging from HSBC Holdings plc (00005.HK) to New World Development Co. Ltd. (00017.HK), trade below book value.

China’s officials have unveiled market-boosting measures almost every night over the past two weeks to reverse the rout in the world’s second-largest equity market.

With about half of all mainland stocks suspended from trading to shield themselves from the panic, sellers turned their attention to Hong Kong to raise cash, many to cover margin loans.

“I’m surprised by the extent of the negative reaction we’ve seen in the Hong Kong market,” the report quoted Manishi Raychaudhuri, Asia Pacific equity strategist at BNP Paribas SA, as saying.

“This is the right time to take a look at fundamentals and not get carried away by this avalanche of selling.”

Shares traded in the city have underperformed mainland stocks this week, dragging the benchmark down 6.4 percent so far, on course for its biggest weekly drop since 2011.

The Shanghai Composite Index is poised for an 0.6 percent advance after the largest three-week selloff since 1992.

The mainland gauge is about 33 percent more expensive than the HSI when measured by price to estimated earnings.

The difference between mainland shares listed in Hong Kong and in Shanghai is even bigger.

The Hang Seng China Enterprises Index trades at 8.2 times projected profits, compared with 15.6 for the Shanghai gauge.

When we look back to these days six months from now, a year from now, they will be proven to be a great buying opportunity,” Brett McGonegal, executive managing director at Reorient Group Ltd., was quoted as saying.

“There’s not a fundamental reason why things have been cut just across the board. These opportunities present themselves very rarely.”

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