April a kindly month for H-share market
The great poet T.S. Eliot famously called April 'the cruellest month'. For investors in the Hong Kong stock market, however, it seems increasingly as if March may actually have been the unkindest month, while April is beginning to look altogether more benign.
Since mid-March, when the benchmark Hang Seng index slumped to its lowest in six months, Hong Kong stocks have regained some of their bounce. In the last three weeks, the Hang Seng has rallied 15 per cent, while the H-share index of mainland companies listed in Hong Kong has jumped 21 per cent.
Of course, those gains will come as little consolation to anyone who bought into the market last October. Both indices are still down by a third from the record highs set then. And with international markets still extremely volatile because of the subprime crisis, it would be foolhardy to rule out the possibility of more falls in the near term.
Even so, interest among international investors has definitely picked up this month, with hundreds of millions of US dollars flowing into mainland equity funds last week, according to the monitoring company EPFR Global.
Part of the reason is that after their long slide, Hong Kong-listed shares are looking cheap once more. Priced at a multiple of about 15 times expected earnings for this year, the H-share index is valued at half the level seen just a few months ago (see the first chart below).
With most stock market analysts expecting mainland company profits to grow by a robust 20 per cent this year and almost as much in 2009, H shares at these prices are an enticing bargain.
But it is not simply the cheapness of H shares in absolute terms that makes them attractive. They are also looking interesting relative to mainland-listed A shares.
Although the premium at which A shares are priced over H shares has contracted sharply since late last year (see the second chart below), A-share prices are still about 40 per cent more expensive than their Hong Kong-listed H-share counterparts.
That differential may not be enough to make H shares attractive relative to A shares while mainland equity markets are falling. But if A-share prices begin to recover, H shares will begin to look very cheap in comparison.
And A shares may just rally soon. With prices down by about 40 per cent from last year's high, talk is swirling that the mainland authorities are getting increasingly nervous about shareholder anger. Many analysts expect the government to step in and support the market soon, for example by restricting equity issues, approving new mutual funds or cutting stamp duty.
Of course, if Beijing really wanted to create an efficient market for long-term capital, it should introduce sensible regulations and then leave things well alone. However, officials may find the temptation to tinker impossible to resist, and attempt to engineer a rally so that everything looks rosy in the run-up to the Olympics.
If that does happen, A-share prices will shoot up and their premium over H shares will widen. Money will begin leaking out of the mainland again as the country's investors resume buying H shares because they look cheap in comparison to mainland-listed stocks. In that case, far from being cruel, April could just mark the start of a kindly new trend.
