Stock Connect

Hong Kong, China see rise in funds vying to tap stock connect schemes

Hong Kong saw a 12.7 per cent rise in the number of mutual funds established in the first half of 2016

PUBLISHED : Tuesday, 23 August, 2016, 8:57pm
UPDATED : Tuesday, 23 August, 2016, 10:55pm

Fund managers are setting up more funds in both Hong Kong and mainland China to capture the increased opportunities created by cross-border share trading schemes such as the newly approved Shenzhen-Hong Kong Stock Connect.

The number of Hong Kong mutual funds rose 12.7 per cent year-on-year to 684 in the first half of 2016, up from 607 a year earlier, according to the Securities and Futures Commission.

On the mainland, 23 new mutual funds were created with the aim of buying Hong Kong stocks under the Shanghai-Hong Kong Stock Connect, up from only seven in the same period last year, according to Thomson Reuters.

The State Council last week approved the launch of the much-anticipated share-trading link between Hong Kong and Shenzhen, which Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia expects to be up and running before Christmas. It will allow international investors to trade 880 Shenzhen stocks via HKEX while mainlanders will be able to trade 417 Hong Kong stocks. It follows the launch of the Shanghai-Hong Kong Stock Connect in November 2014.

We hope to distribute [two Hong Kong domiciled] funds in China, via the mutual recognition of funds scheme
Isabella Chan, Franklin Templeton Investments

Beijing in July last year also introduced the mutual fund recognition scheme that allows Hong Kong funds to be sold on the mainland and vice versa.

Isabella Chan, head of retail business for Greater China & Southeast Asia at Franklin Templeton Investments, said: “To meet local investor demands, we have launched two Hong Kong domiciled funds this year which provide greater access to investment strategies in the global equity and multi-asset income space. In time, we also hope to distribute these funds in mainland China, via the mutual recognition of funds scheme.”

Stewart Aldcroft, chairman of Cititrust, said international investors were interested in setting up in Hong Kong as a stepping stone to investing in mainland stocks, although lacklustre returns were a hindrance to Stock Connect activity.

“Regarding the use of Stock Connect, whether Shanghai or Shenzhen, this also remains a positive, but necessitates there to be far better returns achievable from the markets than has currently been the case, for more activity,” Aldcroft said.

“Their big issue is that while investment returns from China and Hong Kong continue to be poor, relative to other places, and regulations continue to make it quite difficult to proceed, there is a wide-spread ‘wait and see’ attitude, with the hope that some will be successful, which will then encourage more to follow.”

Eleanor Wan, chief executive of BEA Union Investment Management, said her fund houses have already been investing through Shanghai-Hong Kong Stock Connect.

“We are waiting for Shenzhen-Hong Kong Stock Connect to start. Our funds are Hong Kong domiciled, subject to the investment restrictions and disclosure, and will participate into the different schemes to tap into the investment opportunities in China,” she said.

Ken Wong, the Asia equity portfolio specialist at Eastspring Investments, said some of his funds have been trading via Shanghai-Hong Kong Stock Connect and he would also consider Shenzhen stocks.

“However, from a stock-picking perspective, we are less sanguine on the investment opportunities from Shenzhen equities at the moment, which currently trade at a much higher valuation compared with the MSCI China Index, as well as the Shanghai equity market,” he added.

“On a price-to-earnings basis, the Shenzhen Composite Index commands a valuation premium of 42 per cent against the MSCI China Index and 34 per cent against the Shanghai Composite Index.”