Hong Kong ETF investments grow as Hang Seng Index falls
Even as the Hang Seng Index falls, traders have put more than US$200m into the six largest ETFs focused on the city and mainland companies
Investors in exchange-traded funds tracking Hong Kong-listed stocks are unfazed by the city's biggest political unrest since the 1960s, adding money even as the stock market posted its largest drop in seven months.
Since pro-democracy protests escalated on September 28, traders have put more than US$200 million into the six largest ETFs focused on Hong Kong and mainland companies listed in the city.
While the ETF inflows comprise a small portion of trading on the Hong Kong exchange, they signal investors who make market-wide calls are confident stocks will rebound after valuations fell to a 26 per cent discount against their decade average.
Just 13 per cent of companies in the Hang Seng gauge gain most of their sales from Hong Kong, where protests disrupted the "golden week" National Day shopping holiday for mainland tourists.
Firms focused on the mainland make up more than half the measure.
"Investors are staying loyal to the equity market," said Geoffrey Dennis, the head of emerging-market strategy at UBS. "Nobody really expects the protest to have a negative effect on the Chinese economy in the long term."
The Hang Seng Index closed 1.09 per cent higher yesterday. The index pared some of its losses on Friday after mainland policymakers eased property curbs and the sell-off lured bargain hunters. The H-share index yesterday edged up 0.59 per cent.
The pro-democracy protests will undermine investor confidence in Hong Kong as a global financial centre and weigh on retail, financial and property stocks that are already affected by rising US borrowing costs, according to Nomura.
"We can't help considering the risk of some structural derating of Hong Kong equities as investors confront the possibility that Beijing's increasingly hands-on approach may erode public and business confidence," Nomura analysts wrote in a report last month, giving Hong Kong stocks an underweight rating.
The US$7.4 billion Tracker Fund of Hong Kong ETF, which follows the Hang Seng Index, attracted US$124 million over three trading days since September 26.
The number of shares on loan to short sellers fell to 14.7 million on Thursday, from 18.4 million on September 26, the last trading day before the protests escalated, data compiled by Markit and Bloomberg showed.
The iShares MSCI Hong Kong ETF, which trades in the US, attracted US$82 million last week. Short interest fell to 4.2 million shares from five million.
"The market has been a bit oversold and there's some short covering," said Danny Yan, a director at Citic Securities International.
The Shanghai Composite Index closed on September 30 at the highest level since February last year, before shutting for the National Day holiday. The index gained 15 per cent in the past quarter, the biggest rise among the world's 30 largest markets, as the authorities took measures to bolster economic growth.
The Hang Seng China AH premium index, which measures the valuation gap between dual-listed stocks on the mainland and in Hong Kong, rose 1.7 per cent last week, signalling a narrower premium for Hong Kong-traded shares. The Hang Seng Index is valued at 1.3 times net assets, against the 10-year average multiple of 1.8.
"Hong Kong's stock market should be supported" by mainland companies with little business in the city, Michael Spencer, the chief economist at Deutsche Bank, said in a report.
The Hong Kong-Shanghai exchange link, scheduled to start this month, will attract ETF investors and bolster the Hong Kong market, according to Pride Investments Group.
The programme allows the equivalent of US$1.7 billion in daily net purchases of Hong Kong shares and US$2.1 billion for Shanghai.
"A lot of people are expecting the Hong Kong-Shanghai Connect to be launched as scheduled," said Lewis Wan, the chief investment officer at Pride Investments. "For those not quite familiar with the market, they will use ETFs as their first step to investing in Hong Kong."
