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Lowered H shares in the spotlight | Chung Sau Ha

蘋果日報 2021/03/05 09:36


In the last article, I mentioned that there are structural reasons behind the upward adjustment of Hong Kong stock valuation in the near future. In addition to changes in index constituents, there have also been significant changes in the composition of investors. In the past, Hong Kong stocks have been dominated by international investors, for whom Hong Kong stocks may only be a strategic part of their emerging market or Asian stock market investments. If they see better opportunities in other markets, or if they have special needs, they would not necessarily stay. In times of market volatility, it is often reported in the press that Hong Kong stocks would become an “ATM” for foreign investors, or that foreign investors need to withdraw their capital, which is often described as “home bias.”
With the launch of the Hong Kong Stock Connect, it has become the trend for money to flow southbound to buy shares. Since many of the shares listed in Hong Kong are Chinese stocks, mainland investors are more familiar with their business operations than local investors. It can be said that Hong Kong stocks have gradually become a second domestic market for mainland investors, who are becoming increasingly willing to commit to longer-term allocations.
Last year, the net inflow of southbound capital through the Hong Kong Stock Connect exceeded HK$600 billion (US$77.4 billion), accounting for an average of 9% of the market turnover. Recently, southbound capital accounts for over 27% of the total turnover of Hong Kong stocks through Shanghai and Shenzhen Stock Connect.
In other words, the presence of mainland investors in the Hong Kong stock market is increasing, and they are often willing to attach higher valuations to quality stocks, as demonstrated by the fact that A-shares generally trade at a premium to H-shares. Now that the investment barrier between Hong Kong and China is gradually disappearing, it can be expected that H-shares with relatively lower valuation will be watched by mainland investors, which will, in turn, lift the valuation of the overall market.
Looking into the fundamental aspects of the stock market, companies have been announcing their results recently and there is no shortage of positive news, for several reasons. First, after the epidemic was gradually brought under control in the second half of last year, the post-epidemic demand started to take off, stimulating a general rebound in corporate earnings. Second, in addition to improvement in the top-line (revenue), more importantly, many companies have a favorable bottom-line (net profit after deducting costs and expenses) because many companies have carried out cost control and destocking last year, so the level of cash flow has generally improved. Third, naturally, the V-shaped rebound of this year’s figures is due to last year’s substantially lower base.
During the epidemic, when the market was at one point in a standstill, some shops were unable to withstand the situation and went out of business, especially in the retail and restaurant industries. Smaller shops may not be able to resume in the short term, while companies with financial strength or chain businesses can expect to grow further. In other words, the market will consolidate itself and the trend of the strong getting stronger is expected to continue.
(Chung Sau Ha is a senior portfolio manager with Allianz Global Investors.)
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