Hong Kong stocks are not yet ‘richly valued’, expect the rally to continue on mainland fund inflows, analysts say

In spite of a record-breaking rally, Hong Kong stocks are valued at just 12.2 times forward earnings, or near their 10-year historical average

PUBLISHED : Thursday, 25 January, 2018, 9:00pm
UPDATED : Thursday, 25 January, 2018, 11:20pm

Hong Kong’s stock market has started the year with a vigorous, record-breaking rally.

But there is still room for valuations to head higher, especially given accelerating fund inflows from the mainland, according to China International Fund Management (CIFM), a joint venture between JPMorgan Asset Management and Shanghai Trust.

In spite of the bullish action, valuations of Hong Kong stocks are still near their 10-year historical average of 12.2 times forward earnings, suggesting the bull market in the past two years was only a catch up, said Elton Cheung Kai-lim, senior investment manager and Hong Kong equity research director at CIFM Asset Management (Hong Kong).

Moreover, Cheung noted daily southbound flows through the Shanghai and Shenzhen connect schemes accelerated to a net HK$3 billion (US$384 million) this year, up from around HK$1.5 billion per day in 2017.

Rising mainland fund flows into Hong Kong are one reason to be confident of further gains in the Hang Seng Index, Cheung said. Total southbound flows were about HK$770 billion last year, representing less than 5 per cent of the value of stocks on the Hong Kong market, he said.

“And even though the Hang Seng Index has already risen about 9 per cent this year, a rate that is not far from the 10 per cent forecast for its growth in earnings per share, I am still optimistic Hong Kong share valuations and fund flows will continue to increase,” Cheung said.

In contrast, CIFM is conservatively positioned in the Chinese bond market because the People’s Bank of China is expected to keep a relatively tight bias in its monetary policy amid pressure for inflation to rise, according to Alex Leung Chung-ping, investment manager at CIFM Asset Management (Hong Kong).

Meanwhile, regulation over the interbank market means commercial banks will likely reduce their investment in the bond market, he said.

CIFM forecasts China’s gross domestic product growth to slow to 6.7 per cent in 2018 from 6.8 per cent in 2017. Inflation is set to accelerate to 2.3 to 2.6 per cent this year, up from 1.8 per cent last year.

“The global monetary policy easing cycle has ended and China will act in concert. Bond yields will rise and spreads will widen as the PBOC guides rates higher,” Leung said.

Gary Kirk, a founding partner of TwentyFour Asset Management, said liquidity in the Chinese bond market is viewed as being relatively tight compared to other emerging market countries as investors continue to search for yield and income.

“If you want a global diversified bond market then the Chinese market is one area you should be holding, but there are better opportunities on a relative value basis,” Kirk said. “Some Chinese banks have been quite prolific in terms of their issuance, but their spreads are just too tight compared to some of the Eastern European and Latin American borrowers.”