Stock Connect

Mixed expectations from Shenzhen-Hong Kong stock connect scheme

PUBLISHED : Monday, 02 May, 2016, 4:09pm
UPDATED : Monday, 02 May, 2016, 4:09pm

Hong Kong’s mid- and small-cap stocks can expect a bullish momentum as their low valuation will attract mainland Chinese investors when the Shenzhen-Hong Kong stock connect scheme is launched this year, said Gao Ting, head of China strategy at UBS Securities.

“Hong Kong-listed small companies in education, sports and fitness and film industries are the top picks for their high growth and low valuation,” said Gao.

Among Shenzhen stocks, fast-growing sectors like information technology, health care and consumption will be the highlights as they represent China’s ‘new economy’, Gao said, but warned their high valuation may hold them back.

“Shenzhen-listed companies are trading at a high price-earning ratio of 48.6 times on average, compared with 14.5 in Shanghai and 11 in Hong Kong.”

Despite expecting some sectors to pick up, Gao does not see the new Shenzhen link as a major catalyst for all Hong Kong and Chinese stocks in the short term.

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“What the stock connect provides most is greater access for overseas investors to Chinese private enterprises, which comprise over 70 per cent of the Shenzhen market,” he said.

Private enterprises are generally believed to have higher growth and returns potential than Chinese state-owned enterprises, which are the major components of the Shanghai stock market.

Gao is betting an official announcement on the timetable for the second link of Chinese and Hong Kong stocks will come in June as it might take two to three months of preparatory work before an official launch.

But Lu Zhengwei, chief economist at Industrial Bank, is of the view that a new stock connect scheme would not require months of preparation, arguing the second link would only replicate the existing norms for the Shanghai-Hong Kong stock connect.

Lu also sees no chance of a stock rally when the Shenzhen-Hong Kong connect comes on stream, saying it would only provide overseas investors more easier access to the Chinese market.

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“Foreign investors already have many investment choices,” said Lu. “The new connect may bring them more political gains rather than economic ones.”

Gao from UBS said the official timetable of the second link will increase the chances of Chinese shares being included in the MSCI global benchmark indices. “The chances of MSCI announcing the inclusion of A shares in June is well above 50 per cent. But the impact will be limited as only five per cent of the stocks will be included,” he said.

Lu, however, sees little chance of A shares joining in MSCI this June, saying foreign investors will continue to oppose the inclusion as they are still concerned about trading restrictions on Chinese stocks.