Chinese buying of Hong Kong shares under stock connect schemes ‘is increasing risk’, investment firm says

CEO of Scotland-based Martin Currie says however that it remains overweight in Hong Kong shares, given recent good earnings results

PUBLISHED : Thursday, 14 September, 2017, 7:06pm
UPDATED : Friday, 15 September, 2017, 9:07am

A surge in the volume of Hong Kong shares traded by mainland Chinese investors under the stock connect schemes has led to increased volatility and risk and adds to the potential for short-term mis-pricing, according to the head of Scotland-based investment firm Martin Currie.

Mainland investors traded HK$223 billion (US$28.5 billion) worth of Hong Kong stocks in August, the most via the so-called southbound route in the Shanghai and Shenzhen stock connect schemes, since April 2015, when they hit a monthly record of HK$235 billion.

Strong buying by mainlanders of Hong Kong stocks has played a leading role in pushing the benchmark Hang Seng Index up 26 per cent this year. The Hong Kong and Shanghai markets were “connected” in November 2014, allowing trading of Chinese shares by international investors – the so-called northbound route – as well as letting mainland investors trade “southbound” in Hong Kong shares.

A similar connect scheme with the Shenzhen market began in December 2016.

Hong Kong is now trading above long term averages on earnings-based multiples and there are no large pockets of undervaluation, said Paul Danes, chief executive officer of Edinburgh-based Martin Currie, a subsidiary of Legg Mason Asset Management, which had assets under management of around US$745 billion as of June 30, 2017.

“Although in many cases these valuations can be justified if growth continues, the risks are becoming ever more skewed,” Danes said.

He said he prefers a more balanced portfolio, and has been switching within sectors over the past three months, holding consumption and infrastructure related stocks with long-term opportunities, and also utility and telecom companies that have relatively less expectations built into the share prices.

The “risk-reward” on the highly leveraged property sector in China remains unattractive, Danes said.

He remains overweight in Hong Kong and Chinese H shares, given that Hong Kong companies produced far more beats than misses in the second quarter earnings season, and have also been leading the pack in Asia in the number of analyst revisions.

Hong Kong’s Hang Seng Index has been consolidating in a range between 27,400 and 28,130 in recent weeks after failing to make a clean break above the psychologically significant 28,000 level after four attempts.

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Other analysts noted that as Chinese buying via the connect schemes takes a bigger portion of Hong Kong trading, the remaining pool of liquidity for foreign institutional clients has shrunk, given that they tend not to interact with flows from mainland brokers or mainland institutions.

“In terms of the number of shares, there isn’t a whole lot of additional trading in Hong Kong as this year’s turnover was driven by only a handful of stocks,” said Tony Cheung, head of quantitative analytics at Liquidnet, at a separate briefing. “Liquidity is pretty hard to come by in Hong Kong.”

Chinese investors meanwhile have been avoiding buying stocks in overseas markets such as Europe because of their lack of investment sophistication and also because of restrictions imposed as part of Beijing’s capital controls, according to Charles Zhao, China head of sales at Janus Henderson, which manages US$345 billion in assets.

“[Chinese] investors are probably less doubtful about Europe now given the positive developments this year, however headline risk is still in their memory and I am not seeing investors putting money into Europe,” Zhao added.