Euphoria over Hong Kong’s H shares gets new lease of life as laggards catch up to rally

PUBLISHED : Monday, 29 January, 2018, 11:11am
UPDATED : Monday, 29 January, 2018, 12:06pm

The growing frenzy for Chinese offshore stocks has taken a new turn as investors bid up underperformers.

About a third of the companies on the Hang Seng China Enterprises Index racked up fresh one-year highs last week, the biggest proportion since the country’s 2015 stock bubble. Laggards such as PetroChina and China Galaxy Securities have soared, while stubbornly cheap banks are turning red hot.

As a bull market in the China H-share gauge extends into the 715th day, one of the longest in its 23-year history, investors are finding plenty of reasons to buy and few to sell. While technical measures suggest a pullback is overdue, growing confidence around China’s economy and earnings will support the gains for now, according to JPMorgan Asset Management’s Marcella Chow.

“It’s been a very rapid rally but only a change in fundamentals will trigger a correction and people are still quite confident,” said Chow, a Hong Kong-based global market strategist for JPMorgan Asset Management, which oversees US$2 trillion worldwide. “It’s all about finding bargains.”

In such a market, any decline is seen as an opportunity to buy. When the gauge finally snapped a record 19-day winning streak on Thursday with a 1.7 per cent retreat, it rebounded 2.5 per cent the next day as investors pounced on the biggest losers such as banks. At the same time, persistent favourites such as China Vanke and Ping An Insurance (Group) show no signs of slowing down.

As a perennial underperformer itself, due to the index’s dominance by sprawling state-owned enterprises, there’s little for investors to worry about in terms of valuations. Even after an 85 per cent bull run, the Hang Seng China Enterprises trades at 8.9 times its members’ projected earnings. That’s a 39 per cent discount to the tech-heavy MSCI China Index, while a gauge of global equities is about twice as expensive.

Investors have turned to financial and industrial SOEs after spending most of last year piling into tech and Internet shares. Oil giant PetroChina -- which in the past decade suffered the world’s worst-ever stock rout -- has just had its best week in almost two years. Shares of brokers China Galaxy and Haitong Securities flipped to overbought from oversold in about a month.

Growing appetite for financial stocks worldwide has been a boost to the Hang Seng China Enterprises gauge, as half of its components are either banks, insurers, asset managers or brokerages. The sector makes up all but two of the index’s top 10 performers this month, with Citic Securities and Agricultural Bank of China up more than 30 per cent. Analysts at Morgan Stanley predict even more gains this year.

A slumping Hong Kong dollar is adding fuel to the rally, by making the city’s shares cheaper in other currencies, while inflating the value of Chinese companies’ yuan-denominated earnings. Analysts at Credit Suisse Group say new equity funds will attract even more money to large-cap laggards.

“As long as the dollar remains weak, funds will keep flowing into Hong Kong,” said Ben Kwong, executive director at KGI Asia.

Given the tailwinds for Hong Kong’s stocks, investors should stay the course, according to Gavekal Research.

“The Hong Kong market is in a liquidity sweet spot,” Gavekal’s Chen Long wrote in a January 24 note. “Any correction should prove a buying opportunity. The underpinnings of the bull market remain solid: economic fundamentals, valuations and flows all suggest it has further to run.”