Hang Seng Index

Options traders bet on longer run for Hong Kong stock rally

Investors expect low valuations and the trading link with Shanghai will drive further gains

PUBLISHED : Wednesday, 06 August, 2014, 3:03pm
UPDATED : Thursday, 07 August, 2014, 2:33am

For Hong Kong options traders, the stock rally has room to run.

Puts with an exercise price 10 per cent below the benchmark Hang Seng Index cost 2.8 points more than calls betting on a 10 per cent increase, according to a compilation of three-month data.

The price relationship, known as skew, was 15 per cent below the average this year and fell to 0.2 point on July 30, the lowest since November 2012, the data showed.

The index jumped 6.8 per cent in July, the biggest monthly advance since September 2012 and the most among developed markets. It shed 0.26 per cent to 24,584.13 points yesterday.

Investors are betting that low valuations for the city's stocks and the proposed Shanghai-Hong Kong stock connect scheme that will allow cross-trading of shares in the two markets will drive further gains.

"There's more upside for Hong Kong shares as they're still trading at a discount to regional markets," said Pauline Dan, the Hong Kong-based head of Greater China equities at Pictet Asset Management.

"Hong Kong has been a laggard in the global market rally and it's starting to see fresh inflows. The proposed trading link with Shanghai solidifies Hong Kong's position as China's financial centre."

Shares on the Hang Seng Index were valued at 11.4 times estimated earnings on Tuesday, compared with a multiple of 8.8 times for the Shanghai Composite Index, 13.5 for the MSCI Asia-Pacific Index and 16.1 for the S&P 500 Index.

Investors were beginning to appreciate that many mainland shares were undervalued, said Tim Schroeders, a portfolio manager at Pengana Capital.

"Growing confidence in the Chinese economy has helped boost shares in Hong Kong," Schroeders said. "Hong Kong is benefiting from increasing demand for Chinese shares."

The mainland's manufacturing sector expanded last month at the fastest pace in more than two years, signalling a pick-up in growth amid government support. Signs that the economy is improving pushed the H-share index into a bull market last week, having surged more than 20 per cent from an eight-month low on March 20. The gauge ended 0.27 per cent lower at 10,979.93 points yesterday.

"China just emerged from a downturn and we don't know if the improvement is sustainable," said Francis Lun, the chief executive at Geo Securities. "People have enormous optimism on the Hong Kong-Shanghai connect, and that's already overdone."

Four of the five most-owned contracts on the Hang Seng Index were bullish calls, data showed. Investors poured US$413.4 million into the iShares MSCI Hong Kong exchange-traded fund in July, the most since October 2012, after withdrawing funds in the first five months of the year.

"The rally will continue," said Ben Kwong Man-bun, a director at KGI Asia. "There's still positive sentiment on the … connect."