China’s world-beating equity rally puts Hong Kong in the dust
March 14 2019 12:31 AM
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Bull statues displayed outside the stock exchange in Hong Kong. The Hang Seng Index is the least volatile relative to the Shanghai Composite since 2016, in terms of 30-day historical data.

Bloomberg/Hong Kong

Hong Kong equity investors must be looking enviously across the border this year. The city’s two main benchmarks are hardly doing badly, but gauges on the mainland – after a grim 2018 – are eclipsing them and just about every other worldwide.
The ChiNext in Shenzhen has led the charge with a 35% rally. While onshore shares slid yesterday in a volatile trading day, the renewed enthusiasm for yuan-denominated stocks means the Hang Seng Index is lagging the Shanghai Composite this quarter by the most since 2015.
The gap in performance has widened enough to make A shares pricier than stocks in Hong Kong for the first time since October. Cheaper valuations are starting to encourage some mainland traders to look south for bargains, but onshore shares should still outperform thanks to foreign inflows and favorable policies, analysts say.
“If you want to get the best Chinese exposure, A shares are still the best you can get, given that MSCI is gradually increasing the weight of the domestic shares,” said Hao Hong, head of research at Bocom International Holdings Co.
“A shares should outperform Hong Kong stocks throughout 2019.”
Mainland stocks have gone from the world’s worst last year to the best now: the Shanghai Composite Index tops the list of major equity gauges with a 21% gain. That’s almost twice the advance of the Hang Seng Index, while a Hong Kong gauge of Chinese companies is up 13% year-to-date.
The Shanghai gauge fell 1.1% yesterday, while the Hang Seng slipped 0.4%. The ChiNext sank 4.5%.
Average daily stock turnover in Hong Kong is still less than 2018, when $544bn was wiped from the value of the city’s equities.
Daily turnover on the mainland has surged by more than a third and is at the highest since 2015, topping 1tn yuan ($150bn) four times last week and again on Tuesday and Wednesday.
“Investors should bear in mind that A shares are much higher-beta than Hong Kong stocks – that means bigger gains in an uptrend and steeper declines in a downtrend – so you can’t expect Hong Kong equities to deliver a similar level of returns to that on A shares,” said Tai Hui, chief market strategist for Asia Pacific with JPMorgan Asset Management.
In addition to the prospect of inflows due to a bigger weighting on MSCI’s indexes, A shares have been lifted by signs of progress in trade talks with the US, and China’s policies to boost the stock market and economy.
Hong Kong’s open markets, meanwhile, have been partly clouded by cooling home prices and concern over a slowing global economy.
“In a fast bull run, Hong Kong usually underperforms mainland equity markets, because the A-share market – with 60% retail participation – is more driven by sentiment and investors have a relatively relaxed valuation discipline,” said Caroline Yu Maurer, head of Greater China equities at BNP Paribas Asset Management.
“In Hong Kong, you have 70% institutional investors, who will never buy into an overvalued market.” The Hang Seng Index is the least volatile relative to the Shanghai Composite since 2016, in terms of 30-day historical data.
Dual-listed stocks are also now 22% more expensive in mainland China than in Hong Kong.
The growing contrast saw mainland traders turn net buyers of HK$7.8bn ($994mn) Hong Kong shares via stock links with Chinese exchanges last week, a switch from January and the holiday-shortened February, when they net sold a combined HK$12bn, according to data compiled by Bloomberg.
Even so, A shares look set to maintain the upper hand over the coming months.
“Some investors who missed out on Hong Kong’s stock rally earlier may be adding positions lately – that’s a sign of optimism, but these investors don’t always make the right call,” said Daniel So, a strategist with CMB International Securities.
“Hong Kong stocks may continue to underperform A shares for a while as corporate earnings will likely be weak and weigh down the broad market.”




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