21st Century Business Herald reporter Cui Wenjing reported from Beijing On April 24, Hong Kong's major stock indexes all rose sharply, as of the close, the Hang Seng Index, the Hang Seng China Enterprises Index, and the Hang Seng Hong Kong Chinese Enterprises Index rose as high as 2.21%, 2.45% and 1.77% respectively on the same day.
This is the third day in a row that the three major indexes have risen sharply. Taking the Hang Seng Index as an example, as of the close of trading on April 24 (the same below), it rose 6.02% in the week, an increase of nearly 1,000 points, hitting a new intraday high in the past five months.
According to the analysis of interviewees, there are many factors for the sharp rise in Hong Kong stocks: including the five capital market cooperation measures issued by the China Securities Regulatory Commission on April 19, UBS upgraded the ratings of China A-shares and Hong Kong stocks to overweight on April 23, the Hong Kong Monetary Bureau injected HK$500 million and HK$525 million of liquidity into the Hong Kong banking system through the discount window on April 22 and 23 respectively, and China's PMI and trade data have been generally better than expected since the beginning of the year, driving the market's confidence in China's economy to increase.
Among them, the five capital markets have played a particularly significant role in Hong Kong's co-operation measures. It clarifies that the scope of eligible products of equity ETFs under Stock Connect will be relaxed, REITs will be included in Stock Connect, RMB stock trading counters will be included in Hong Kong Stock Connect, mutual recognition of funds will be optimized, and leading enterprises in mainland industries will be supported to list in Hong Kong.
According to Bi Mengjiao, a financial researcher at Grid Finance, these measures will not only help strengthen the interconnection between the capital markets of the mainland and Hong Kong, but also enhance Hong Kong's status as an international financial center, thereby attracting more international investors, injecting strong confidence and momentum into the Hong Kong stock market, and promoting the continuous rise of the market.
The SFC "activated" Hong Kong stocks in five moves
Since the China Securities Regulatory Commission (CSRC) issued five capital market cooperation measures for Hong Kong on April 19, Hong Kong stocks have risen sharply day after day. As of the close of trading on April 24, the Hang Seng Index, the Hang Seng China Enterprises Index and the Hang Seng Hong Kong Chinese Enterprises Index all rose on the day, up 2.21%, 2.45% and 1.77% respectively on the day, and increased by 0.90%, 5.75% and 6.04% for the year.
From the year-on-year increase, it can be seen that the growth rate of the index that is highly correlated with mainland enterprises is more obvious. According to the interviewees' analysis, this is closely related to the positive performance of China's economy during the year and the five capital market co-operation measures with Hong Kong.
On the one hand, among the listed companies in Hong Kong, China, Chinese enterprises account for more than 70% of the market capitalization and more than 80% of the trading volume, and China's economy has a great impact on Hong Kong stocks. "Since the beginning of this year, China's economy has been stable as a whole, especially since the beginning of the year, the PMI and trade data have been generally better than expected, which is conducive to stabilizing investor confidence to a certain extent. Guotai Junan wrote in its research report.
On the other hand, the five capital market co-operation measures with Hong Kong have opened up new channels for mutual access between the Mainland and Hong Kong, injecting new momentum into the rise of Hong Kong stocks.
First of all, the relaxation of the scope of eligible products of equity ETFs under Stock Connect is seen as the biggest benefit.
Goldman Sachs chief China equity strategy analyst Liu Jinjin told the 21st Century Business Herald reporter that in the past two years, southbound funds have been net buying more than $40 billion per year, becoming the most important source of capital inflow in the Hong Kong stock market.
Ying Xiwen, a senior researcher at the Research Institute of Minsheng Bank, also believes that the relaxation of the scope of eligible products of stock ETFs under the Stock Connect is mainly to significantly reduce the threshold for the size of ETFs to be included in and out of the Stock Connect mechanism, as well as the weighting requirements for ETFs tracking the index. As a result of the lowering of the threshold, the number of ETFs included in the Stock Connect will increase in the future, which will help investors in the Mainland and Hong Kong markets expand the range of allocable ETFs and enhance the attractiveness of the two markets. At the same time, some industry-themed ETFs related to high-quality development will also be included, which is conducive to the capital market to support the transformation of high-quality development-related industries.
Secondly, supporting the inclusion of RMB stock trading counters in the Hong Kong Stock Connect is also one of the most important measures in the eyes of the interviewees.
According to Ying Xiwen, a total of 24 Hong Kong-listed companies have set up RMB counters, which can mainly provide offshore RMB funds to directly buy RMB-denominated stock targets in the Hong Kong market. After the new policy, southbound funds can directly buy RMB-denominated Hong Kong stocks, and dividends will also be in RMB, which can avoid certain exchange risks. It is more beneficial for investors who prefer long-term dividends in the mainland.
According to Tian Lihui, dean of the Institute of Financial Development of Nankai University, supporting the inclusion of RMB stock trading counters in Hong Kong Stock Connect will help the internationalization of RMB and the further opening of the capital market.
In addition, supporting the listing of leading enterprises in the mainland industry in Hong Kong should not be underestimated.
With the gradual tightening of the IPO rhythm of the Shanghai and Shenzhen stock exchanges and the raising of the listing threshold, more mainland enterprises have shifted their first choice for listing to Hong Kong stocks, and the support of policies has further strengthened the enthusiasm of enterprises to go to Hong Kong. Ying Xiwen believes that the introduction of this measure will help activate Hong Kong's capital market and consolidate and enhance Hong Kong's status as an international financial center on the one hand, and on the other hand, it will also help mainland leading enterprises make full use of overseas financing channels and open up to global investors.
At the same time, the other two of the five measures – the inclusion of REITs in Stock Connect and the enhancement of the Mutual Recognition of Funds (MRF) arrangement – have also contributed to the rally of Hong Kong stocks. According to the analysis of Ying Xiwen, the inclusion of REITs in the Stock Connect expands the scope of investment targets under the Stock Connect mechanism, which is conducive to investors in the Mainland and Hong Kong who prefer stable dividend products, and will also provide incremental capital and liquidity for the REITs markets of the two places, and promote the development of the REITs markets of the two places。
Allocation opportunities for Hong Kong stocks
While Hong Kong stocks are soaring, foreign investors are also bullish on China's stock market.
On April 23, UBS upgraded China A-shares and Hong Kong stocks to overweight, expecting Chinese equities to have a high-single-digit upside this year.
Goldman Sachs is also bullish on Chinese equities. Fu Si, a Goldman Sachs China equity strategy analyst, told reporters that the allocation of foreign active investors to Chinese stocks has shown a warming trend, but the allocation is still at a historical low, and Goldman Sachs believes that it will continue to rise in the future. The recent general improvement in international investors' interest in Hong Kong stocks and risk appetite, especially in the Middle East and ASEAN capital, reflects the fact that regulatory efforts to promote a more diversified Hong Kong market are beginning to bear fruit.
In Tian Lihui's view, the upgrade of Chinese stock ratings by foreign investors shows that foreign institutions are optimistic about the prospects of the Chinese market, which in turn promotes the gradual inflow of foreign capital into A-shares and Hong Kong stocks. Foreign overweight in Chinese equities is based on a positive assessment of China's economic growth, market reforms, policy support, and other factors.
From an investment perspective, what are the current allocation opportunities for Hong Kong stocks?
"In the next three months, Hong Kong stocks have the opportunity to outperform A-shares, with less risk of downward revisions to Hong Kong stocks' earnings and cheap valuations. Over the next 12 months, the MSCI China Index is expected to target 60, implying about 10% upside. Fu Si is quite optimistic about the trend of Hong Kong stocks.
Bi Mengjiao also remains optimistic about the trend of Hong Kong stocks. It mentioned that judging from the current market reaction and fundamentals, the Hong Kong stock market is expected to continue to maintain an upward trend. From the perspective of funds, since the Hong Kong stock market is dominated by foreign investors, judging from the signals released, the Federal Reserve will most likely cut interest rates this year whether it is June or September, and liquidity is expected to be more loose. From a fundamental point of view, the continuous improvement of Chinese mainland economic fundamentals continues to underpin the Hong Kong stock market. In the long run, driven by the improvement of the internal and external environment and the low valuation, Hong Kong stocks are likely to continue to fluctuate and rebound.
Hong Kong stocks have upside, where to start in terms of investment?
Based on the analysis of the interviewees, the high-dividend related areas that pay more attention to dividends and buybacks are the most noteworthy. For example, Fu Si mentioned that stocks with higher shareholder returns, that is, stocks with high dividends and repurchase plans, will continue to be favored by investors.
UBS Wealth Management's Chief Investment Office is bullish on resilient, revenue-generating sectors and companies that can deliver high dividend yields to investors in the face of further market volatility, as well as sectors such as financials, utilities, energy and telecommunications, particularly large state-owned enterprises in these sectors.
Goldman Sachs is bullish on the Internet sector, and Fu Si believes that in the current macro environment, non-tradable goods (i.e., services) may outperform tradable goods, with the former having a more favorable environment for revenue growth and better capital expenditure and cost management.
Tian Lihui also believes that the Internet sector has a relatively high allocation value. At the same time, he reminded that the allocation of Hong Kong stocks needs to consider overseas risks, international capital flows, but also the fundamentals of individual stocks, industry prospects, policy environment and macroeconomic conditions.
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