Confidence keeps Hong Kong small-cap rally going
Mainland investors are continuing to pump money into Hong Kong, betting on continuing government stimulus to shore up the market
Hong Kong's small-cap rally is showing no sign of letting a little thing like valuations get in its way.
After a 28 per cent surge last month, the Hang Seng Composite Small Cap Index traded on Monday at 27 times trailing earnings, the highest in data dating back to 2010 and more than double the multiple for bigger equities. With stocks from China Merchants Land to Coolpad more than doubling in the span, volatility on the measure soared to the highest in more than three years.
As mainland Chinese investors pump cash into the city, their preference for small caps is becoming more pronounced. Confidence that Beijing would keep the rally going with stimulus was everywhere, Convoy Asset Management said.
"Liquidity is going into the market, and small caps are going to keep surging," said Cedric Ma, a Hong Kong-based senior investment strategist at Convoy. "What we're seeing is gains not due to the fundamentals or the earnings aspect, but more on the macro environment."
The Hong Kong small-cap gauge surged 33 per cent from March 27 to Monday, as the market began to rally after the mainland regulator made it easier for some mainland fund managers to buy equities listed in the city. That is more than twice the advance by the Hang Seng Composite Large Cap Index.
While mainland investors did not have direct access to small caps through the Hong Kong-Shanghai stock link, they were buying them through a separate quota programme, Hu Xiaohui, chief strategist at SWS Research, said last month.