Hong Kong stocks’ discount to net assets entraps mainland Chinese funds betting on turnaround

About 77 per cent of mainland China-domiciled mutual funds that focus on Hong Kong stocks have posted losses this year

The Hang Seng Index trades at a 2 per cent discount to its book value, the fifth time this year it has been cheaper than its intrinsic value

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Exchange Square, the building that houses the stock exchange, in Hong Kong. Photo: EPA-EFE

Published: 7:30am, 6 Dec 2021Updated: 11:30am, 6 Dec 2021

Hong Kong stocks have become a valuation trap for mainland Chinese money managers.

The Hang Seng Index’s bouts of dipping below book value this year have failed to fetch bottom-fishing opportunities for fund managers that invest in Asia’s third-largest market through the cross-border Stock Connect programme.

Among the 39 mainland China-domiciled mutual funds that focus on Hong Kong stocks, only nine have delivered returns so far in 2021 and the rest have posted losses ranging from 0.6 to 21 per cent, according to Bloomberg data. The worst performer was the US$138 million fund run by Shanghai-based China Universal Asset Management, whose losses were almost double those of the Hang Seng Index.

The Hong Kong benchmark has been trading below its net-asset value over the past six days, its longest such stretch this year, as the emergence of the Omicron variant of Covid-19 and the arrest of Macau’s biggest junket operator have unsettled trading. While the broader market’s dip below or close to book value typically foreshadows a massive turnaround in China’s onshore stocks, that may not be the case for the Hong Kong market.

“With lots of big-weight internet companies, the headwinds on Hong Kong stocks haven’t entirely receded and the market may still be finding a bottom now,” said Huang Senwei, a Shanghai-based strategist at Allianz Bernstein with US$686 billion in assets under management. “We prefer [mainland China’s] A shares to Hong Kong stocks, because of less regulatory uncertainty and more listings of companies with strong industry sentiment that are linked to green energy and carbon neutrality.”

The Hang Seng Index has been battered by China’s regulatory crackdown, earnings misses by technology juggernauts such as Alibaba Group Holding, increased scrutiny of Macau’s gambling industry and lingering tensions between Beijing and Washington.

The price-to-book multiple of the 60-member benchmark stayed at 0.98 times on Friday, the fifth period of time this year in which it has traded at a discount, Bloomberg data shows. The gauge has dropped 13 per cent this year, making it the worst-performing major benchmark globally. The Hang Seng Tech Index approached its record low on Friday, with a 1.5 per cent drop sparked by Didi Global’s decision to withdraw its US listing and a further step by the American securities regulator to expel Chinese companies trading in the US that do not comply with its financial disclosure requirements.

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