Chinese investors are not abandoning Hong Kong’s stocks, even as Asia’s third-largest equity market endures a double whammy of social upheaval and jitters about a global recession.
Mainland traders have been buying the city’s stocks for 21 straight days through Friday via the cross-border investment channel known as the Stock Connect, pouring an aggregate HK$45.3 billion (US$5.8 billion) into equities listing on the Hong Kong stock exchange. That was the longest buying spree since February 2018, when capital poured in for 31 consecutive days.
While global fund managers are taking a cautious approach to Hong Kong stocks, with the protest against a controversial extradition bill descending into the city’s biggest civic unrest, some Chinese investors are setting their eyes on the lucrative price discrepancy between the two markets.
Hong Kong stocks currently trade at a 23 per cent discount to the mainland-traded shares, the biggest for such a price gap in almost one and a half years, according to a gauge compiled by the Hang Seng Bank to track the discrepancy.
“The low valuation will create entry opportunities for investors,” said Gerry Alfonso, director with the international business department at Shenwan Hongyuan Group in Shanghai. “There is a lot of macro noise but valuations in markets such as Hong Kong tend to be the deciding factor in the long run. A lot of the macro noise is already reflected in prices.”
The Hang Seng Index is valued at 10.3 times earnings, cheaper than the multiple of 13.7 times in the Shanghai Composite Index, according to Bloomberg data. That makes Hong Kong’s key benchmark the cheapest among Asia’s major markets on a price-to-earnings basis. Out of the 10 industries on the index that its constituents are engaged in, five trade below their book values, the data showed.
The discrepancy is particularly stark among the 113 stocks that are listed on both the Hong Kong and China exchanges, with all but two companies – Anhui Conch Cement and Bank of Qingdao – trading at higher prices on the mainland.
“There’s limited room for further downside in the valuation of Hong Kong stocks,” said Zhang Yusheng, an analyst at Changjiang Securities.
Funds from mainland China have helped Hong Kong’s capital market weather the turmoil in the global financial markets. The Hang Seng Index advanced on Thursday, decoupling from declines in major benchmark in the global markets.
Still, increased buying now is not a harbinger of a bull market to come. In the previous stretch of buying that ended in February 2018, the Hang Seng dropped 2.9 per cent in the subsequent three months.
Hong Kong’s US$4.9 trillion stock market is third in Asia after China’s US$6.4 trillion market and Japan’s at US$5.6 trillion, according to Bloomberg data.
“Valuations in Hong Kong are cheap with a large size of the earnings coming from the mainland and that should give them some long term stability,” said Alfonso with Shenwan. “But that is a trade that requires substantial self-discipline to handle the ups and downs.”