Bullish bets on HKEx at highest in almost four years

Bullish bets on Hong Kong Exchanges and Clearing cost the most in almost four years amid optimism that demand for mainland firms' shares listed in the city will boost trading volume. Calls that pay should the world's second-biggest exchange operator by market value rally 10 per cent cost 7.7 points more than equivalent bearish bets as of Tuesday last week, the widest gap since February 2011. HKEx shares will extend gains this year, after rallying 33 per cent last year, as higher equities volume and contributions from the London Metal Exchange (LME) drive earnings growth, according to Bank Julius Baer and BNP Paribas. The value of shares traded at the bourse climbed 37 per cent year on year to a daily average of HK$80.3 billion in the fourth quarter of last year as the H-share index rallied 16 per cent. The Shanghai Composite Index soared 37 per cent during the period. "We're optimistic on Hong Kong Exchanges," BNP Paribas analyst Dominic Chan said. "We expect further rate cuts in China and that will further boost stock market volumes in Hong Kong. LME is also starting to contribute positively to the growth." HKEx's profit is expected to steadily increase. Net income will climb to HK$5.1 billion for last year and HK$6.7 billion this year from HK$4.55 billion in 2013, according to a survey of analysts. The exchange posted revenue of HK$962 million from commodities traded at LME in the first three quarters of last year, accounting for about 14 per cent of total revenue of HK$7.1 billion. Mainland shares accelerated gains after the People's Bank of China delivered a surprise rate reduction in November. "Hong Kong's trading volumes have been very good, driven largely by the increased interest in China's equity market," CLSA analyst Marcus Liu said. "Since the interest rate cut in November the Chinese market has been on fire, with volumes in the A-share market in Shanghai and Shenzhen surging. That has pulled up volumes in Hong Kong's H-share market." For investors wanting to own mainland firms' shares, those listed in Hong Kong do not have the compliance issues that have weighed on purchases of mainland-listed shares through the Shanghai-Hong Kong stocks through-train scheme. Many foreign asset managers have rules that prevent them from transferring Shanghai-listed equities to brokers before they are sold, as currently required by mainland regulations. Hong Kong's bourse said it would offer new trading accounts as soon as next month, enabling fund managers to overcome that hurdle. There has also been talk of scrapping requirements for mainland investors to have at least 500,000 yuan (HK$627,800) in their accounts to be allowed to buy Hong Kong shares, according to BNP Paribas. Such fine tuning should help increase use of the link, Chan said, adding the authorities would "make sure" the through train was a success. H shares traded at an 18 per cent discount to their mainland counterparts on Monday, adding to their allure. The H-share index was valued at 7.9 times estimated earnings at Monday's close, compared with a multiple of 11.9 for the Shanghai Composite Index. While efforts to improve flows were positive, Morningstar analyst Michael Wu said valuations for HKEx looked stretched. The bourse traded at 30 times projected profits at Monday's close. That compares with multiples of 22 for Japan Exchange Group and 25 for Singapore Exchange. "The stock looks overvalued at the moment," Wu said. "We see the Shanghai-Hong Kong connect as a very big positive step but it's more of a longer-term benefit for the exchange, rather than a short-term catalyst. We still need to see the physical volumes coming through." The HSI Volatility Index, which measures the cost of options on the Hong Kong equity benchmark, rose 2.1 per cent to 15.96 on Monday. Implied volatility, used to gauge option costs, for three-month contracts with an exercise price 10 per cent above HKEx shares was 26.8, compared with 20.2 for those with a strike price 10 per cent below. Traders have been reducing the number of bearish bets on the stock, with the ratio of outstanding puts to calls falling to 1.15 on Friday, down from an August peak of 1.62. The bourse operator could also get a boost from an equity link with Shenzhen. "We remain positive on Hong Kong Exchanges," Julius Baer analyst Kelvin Wong said. "There will be a lot of initiatives in China that will be beneficial to the stock. The Shanghai-Hong Kong connect is just one of them."

Bullish bets on HKEx at highest in almost four years

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Costs rise amid optimism that locally listed mainland firms' shares will boost trading volume after stocks rallied 33 per cent last year

Costs rise amid optimism that locally listed mainland firms' shares will boost trading volume after stocks rallied 33 per cent last year