Across The Border
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International investors welcome Shenzhen and Hong Kong connect

Official confirmation of scheme launch seen as signal to outside world that the Chinese stock market is back to normal

PUBLISHED : Thursday, 24 March, 2016, 4:05pm
UPDATED : Thursday, 24 March, 2016, 4:05pm

Fund managers and brokers welcomed official confirmation that the Shenzhen and Hong Kong stock connect scheme would launch in the second half of this year, citing a desire by both retail and institutional investors to participate in the smaller of the two mainland bourses.

Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said last week that the Shenzhen-Hong Kong stock connect programme would kick off in the second half of this year. It was the first time an official has publicly spoken about a launch time frame after the initiative was postponed from late last year due to the volatile market.

Rex Auyeung, Asia president at Principal Financial Group, said the launch was good news because it sends “a signal to the outside world that the Chinese market is back to normal”.

“From an international investor perspective, the concept is a positive one which would offer more choices but in view of the activities in the last few months, I think some investors would take a conservative view and gauge the development before rushing in,” Auyeung said.

The Shenzhen and Hong Kong stock connect scheme will be the second cross border trading initiative after the first such scheme was launched in November 2014 , linking Hong Kong Exchanges and Clearing and the Shanghai Stock Exchange. The scheme allow investors on both sides to conduct cross border trading up to a certain monetary cap per day.

Ken Wong, client portfolio manager at Eastspring Investments (Hong Kong), believes international investors would be interested in trading Shenzhen stocks.

“There would definitely be some companies that would be of interest on the Shenzhen Exchange given that over 40 per cent of companies in the CSI 300 are listed in Shenzhen,” he said. “Most of the global managers would be interested in the benchmark stocks that would be included in the MSCI benchmarks should A-shares get included this year.

“The Shenzhen Stock Exchange is known for its tech companies and has some hardware and software IT companies which aren’t available for investing in Hong Kong or via US American Depository Receipts (ADRs).

“In addition, some of the Chinese ADR companies who are being privatised in the US might re-list in Shenzhen given the higher valuation multiples they can get in Shenzhen, which could pave the way for further interest in Shenzhen shares going forward,” he said.

Some of the Chinese ADR companies who are being privatised in the US might re-list in Shenzhen given the higher valuation multiples they can get
Ken Wong, Eastspring Investments

However, Wong warned that investors need to be careful about risk factors because of the high valuations and volatility of the stocks as seen over the past few years.

Henry Chan, chief investment officer at BEA Union Investment Management, believes international investors would be interested in some sector of the Shenzhen market, but not all. “Financials, materials and energy sectors are unlikely to be international investors’ targets as they are more correlated to the cyclical macro outlook,” he said.

“The key areas of interest are likely to centre around consumer, healthcare and technology where more unique bottom-up exposure can be obtained. Such stocks are relatively stable and demonstrate lower volatility compared to the [broader] Shenzhen market,” Chan said.

Echoing that sentiment, Bruno Lee, senior managing director of Manulife Asset Management, said Hong Kong and Shenzhen stock connect would give overseas investors the opportunity to buy into many innovative companies.

“The southern exchange serves as a good platform for innovative companies from the internet-plus industries and sectors to be benefited from China’s continued economic reform. From a fund manager perspective, we advocate a diligent bottom-up approach and prudent stock selection process, looking at key indicators such as corporate governance, management team, stock liquidity and trading volume,” Lee said.

Hong Kong Investment Fund Association chief executive Sally Wong said a survey of the association last year showed that 90 per cent of its members want the new connect scheme.

Fund managers have been looking forward to the launch as they see that the Shenzhen pool is complementary to the Shanghai pool of stocks. The two pools will enable foreign investors to capitalise on the growth of companies at various stages in the economic cycle,” she said.

The mainland market is now primarily traded by retail investors and Wong said the new cross border trading scheme would allow more institutional investors to trade in the mainland markets.

“This can help steer the market to focus more on long-term fundamentals,” she said.

Keith Pogson, senior partner of accounting firm EY, said the Shenzhen exchange has listed many high growth companies. “Knowledgeable investors may be willing to manage the trade off between risk and reward and actively participate in such stocks,” he said.

“Obviously a great deal of understanding or research is required before accessing these less mature markets. If possible it may make sense to have a phased approach to implementation with the introduction of some stocks from the main Shenzhen board first, then as investor understanding and appetite builds, as well as technology is fully tested, this could spread to the ChiNext and SME Board.”