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The Hong Kong/Shanghai Equity Link Catches Fire As H Shares Surge - Wealth Manager Reactions
Tom Burroughes
13 April 2015
After a period when it might have seemed that the Hong Kong/Shanghai Stock Connect equity market link had got off to a steady but not spectacular start, that has all changed with a surge in Hong Kong share prices over the past fortnight. Onshore Chinese capital is being driven south, wealth managers say.
Since the equity market link, aka “through train”, went live in November last year, this move to widen foreign investor access to mainland China’s equity market – and bolster Hong Kong’s financial prowess – hadn’t quite set the world alight. Investors have fretted about decelerating Chinese growth as the Asian giant seeks to direct its economy towards a more balanced model.
However, it appears some concerns about China have faded and the market for H-shares – Hong Kong-listed Chinese companies – has rallied by as much as 15 per cent in two weeks. Analysts say Hong Kong shares had lagged their mainland counterparts by as much as 33 per cent.
“The recent euphoric rally in Hong Kong shares has largely been driven by valuation gaps and positive regulatory support for mainland investors to invest in the Hong Kong market,” , the UK-listed wealth manager operating in markets such as the Asian one, said in a note.
“The recent surge in Hong Kong’s stockmarket has added strong gains as liquidity and bullish sentiment on domestic China A-shares is having a spillover effect on the Hong Kong market. Meanwhile, the valuation gap between A shares and H shares has widened considerably recently as the Shanghai Composite has risen over 90 per cent since late June last year,” the firm said.
Schroders said the valuation gap between H shares and A shares (shares of Chinese firms listed in the mainland), at a time when China is lowering barriers to the Hong Kong market for mainland investors, is pushing mainland funds into the market, boosting Hong Kong prices.
The market surge is also a reflection of how China, still a Communist-led country, is seeking to open up its economy and capital markets to international investment and strengthen the status of the renminbi as a global currency.
The China Securities Regulatory Commission announced new guidance at the end of March for publicly offered securities investment funds (mutual funds) in China to invest in Hong Kong-listed equities through the Shanghai-Hong Kong Stock Connect Scheme. The southbound component of the stock connect scheme allows eligible investors, with at least RMB500,000 in their trading account, to buy a select range of Hong Kong-listed stocks.
By removing a pre-approved qualification process for onshore mutual funds, these funds can now invest through the southbound scheme. This trend of sharp rises in share prices has been reflected by the substantial increase in trading volume of late. In addition, southbound investment with the Shanghai-Hong Kong Stock Connect Scheme has surged to its highest level since the programme was launched in November 2014, Schroders noted.
A rising valuation gap between A and H shares was another factor driving Chinese onshore capital to Hong Kong, the firm said.
“Recent moves took the average premium of domestic-listed A shares over Hong Kong-listed H-shares down from 35 per cent to 28 per cent. With the A share market still rising in spite of weak economic data and poor company earnings in China, H shares are becoming an increasingly attractive alternative. However, valuations are generally starting to look expensive, which makes us cautious about chasing some stocks,” the firm said.
More to come
Schroders reckons the surge of the past fortnight may not be the last of such activity because most China domestic mutual funds have their mandates limited to A share investments, so to take part in the southbound trade under the new guidance, they will need to launch new products or modify existing mandates.
Over at , a frontier markets specialist firm, it regarded the equity market drama as an example of how investors are overcoming undue pessimism about China.
“Press and investor sentiment on China has remained unrelentingly gloomy for several years, due to concerns about slowing growth, lack of transparency, a perceived property sector bubble, and high levels of debt among China’s regional governments,” Mike Sell, head of Asian investments at Alquity, said in a note.
Sell said that the immediate cause of the H share rally was a rule change allowing Chinese fund managers to hold Hong Kong-listed shares; with A shares 33 per cent more expensive than Hong Kong ones, it wasn’t long before investors piled into the H share market to exploit the gap.
“More significantly, however, and despite the headlines, this interest is underpinned by the genuine improvement in China’s economic fundamentals, as programmes of monetary easing and structural reform take hold. Developments have included the cutting of interest rates by 25 basis points, banks' reserve requirements being reduced, the announcement of bank deposit insurance, and a significant portion of off-balance sheet, and thus opaque, local government debt being converted to bonds,” said Sell.
“However, investors have been consistently sceptical and have largely ignored this news, and consequently, in our view remain underweight. This significant rally should focus overseas investors' minds, and will help break the ‘value trap’ stigma associated with the market over recent years. The combination of a consensus underweight, attractive valuations, fundamental economic improvement and a powerful and ongoing market liquidity stimulus will force investors to reassess their weightings,” he said.
“This is not to suggest the strength in China will be at the expense of 'the' investment of 2014 - namely a resurgent India. Nor will it be at the expense of Asian frontier markets, where the investment case remains compelling. Reflecting this, the Alquity Asia Fund has a 20 per cent weighting to China, 20 per cent in India and 33 per cent in frontier markets."
He concluded that investors will sell “Old Asia” markets of Australia, Taiwan, Korea and Singapore to tap newer opportunities, although most investors’ weightings haven’t reflected that opinion.