Hong Kong stocks are at their cheapest relative to mainland Chinese equities in two years as Citic Securities predicts 20 per cent gain

The global coronavirus pandemic has sent Hong Kong stocks to their cheapest level relative to Chinese equities in two years, a price gap that Citic Securities says may spur a 20 per cent gain in the city’s shares.

A gauge tracking the price discrepancy between the two markets showed that Chinese companies trading in Hong Kong traded at discounts of up to 27 per cent to their onshore counterparts this month. That is the widest gap since February 2018.

Citic Securities, the mainland’s biggest listed brokerage, said the divergence would create a good opportunity to “buy the dip” – buy shares at their cheapest level in expectation of a rise. Citic believes Hong Kong stocks will climb at least 20 per cent once the Covid-19 epidemic fades.

Mainland Chinese traders have already been increasing their holdings of the stocks, even as the Hang Seng Index entered bear market territory this month for the first time since 2015, after declining 20 per cent from a high in April.

“The decline of Hong Kong stocks, an offshore market, was caused more by the global liquidity squeeze,” said Yang Lingxiu, a strategist at Citic. “After the quick, sharp drop, the market now has a long-term safety margin. Chinese stocks are expected to attract overseas investors first, with the epidemic in China under control, resumption of factory production and a drop in interest rates.”

He recommends Hong Kong-traded Chinese companies, including internet giant Tencent Holdings, coal producer China Shenhua Energy and property developer Sunac China Holdings.

Hong Kong’s market, the third largest in Asia, is more vulnerable to swings in overseas stocks than the mainland markets, whose restrictions on foreign buying partially shield it from the global rout that has swept almost every asset class. The Shanghai Composite Index remains the only major benchmark in the world that has not slipped into a bear market.