UBS raises H-shares forecast as mainland capital inflow surges

Hang Seng China Enterprises Index tipped to end the year at 9,800

PUBLISHED : Wednesday, 27 July, 2016, 6:31pm
UPDATED : Wednesday, 27 July, 2016, 9:57pm

UBS has raised its annual forecasts for the Hang Seng China Enterprises Index (H-shares), suggesting the index will close 2016 at 9,800, due to increasing amounts of capital pouring in from institutional mainland investors.

The index gained 0.3 per cent or 30.77 points to close at 9,093.02 on Wednesday.

“Capital from Chinese funds, insurance companies and other institutional investors surged from late June to early July,” said Wenjie Lu, an H-shares strategist at the Swiss bank.

Given the ample liquidity in the mainland and deteriorating credit risks in China’s corporate sectors, Lu said H-shares have become more attractive to Chinese institutional investors.

“Most capital is being invested in undervalued stocks, which is a more stable and sustainable source than capital from retail investors. That strong support will continue,” Lu added.

Most capital is being invested in undervalued stocks, which is a more stable and sustainable source than capital from retail investors. That strong support will continue
Wenjie Lu, an H-shares strategist at UBS

In addition,UBS expects the fundamentals of H-share companies to improve due to increasing overseas mergers and acquisitions.

Companies with overseas M&A plans, especially those that could include the purchase of advanced technologies, are expected to outperform, according to Lu.

“For example, we have seen many deals planned by China’s pharmaceutical companies and medical service providers. We believe the acquisition of technologies from overseas peers could boost their margins dramatically,” said Lu.

IT hardware and semiconductor producers are also being tipped as possibly hot targets, as many seek to upgrade their technology through M&A deals, according to the bank, especially those which help to boost profits.

The ongoing reform of China’s state-owned enterprises, too, is expected to continue to benefit H-shares.

“We have seen new policies coming out, but going forward, we need to assess to extent those policies can be implemented,” added Lu.

UBS’ biggest concern, however, are risk levels at the country’s financial institutions.

Lu said that is likely to rise, given the mainland is facing deteriorating credit risk and the banks have had to set aside more capital to cover non-performing loans.

Mingyi Li, an analyst with China Investment Securities, is even more positive on H-shares, citing strong liquidity from the central bank and the likely positive effects of the soon-to-launch Shenzhen-Hong Kong Stock Connect.

Li said the share-trading link will especially benefit small and medium cap H-shares, which could rise around 10 per cent by the end of 2016.

Another bullish recent prediction for the H-share market came from HSBC.

In anticipation of a slew of first-half earnings reports in coming weeks, the bank said that with earnings forecasts already cut 13-15 per cent for H-shares in the past six months, and potential headwinds already factored in, it thinks the downward revision cycle is now at an end, and stocks are already seeing light at the end of the tunnel.