The mutual market access program that is due to launch in October between the Hong Kong and Shanghai stock exchanges is another step towards capital market liberalization. It will allow much easier access for foreign investors to the onshore Chinese Shanghai A-shares market as well as reciprocal investment by mainland Chinese investors in the Hong Kong market.
With the program due to kick off this month, foreign investors are busy doing their homework on Shanghai A-shares and trying to figure out what stocks mainland investors will choose to buy in the Hong Kong stock market.
Many overseas investors will be looking to buy dual-listed shares that are cheaper in the A-share market than in Hong Kong. However, we feel this arbitrage focus misses the more interesting development for foreign investors, which is to buy unique exposures, such as thermal coal railway owner Daqin Railway, traditional Chinese medicine producers, such as Tasly Pharmaceutical, and large capitalisation stocks that are unfashionable with local mainland investors and, therefore, very cheap, such as SAIC Motor, a joint venture partner with VW and GM.
Back in the Hong Kong market, while it is possible that mainlanders will buy well-known companies that were previously unavailable to them — like Tencent, which runs the ubiquitous QQ and Weixin internet and smartphone communication platforms (and is the largest holding of the Henderson China Opportunities Fund) — we think a more likely outcome is a dramatic increase in the volatility of small-cap stocks in Hong Kong. The Shanghai market is dominated by retail investors and they prefer to be active traders of smaller capitalization companies. If they transfer this characteristic to Hong Kong, then already volatile small-caps may well experience even more dramatic swings in performance and valuation as the stocks fall in and out of fashion with mainland investors.
The Henderson China Opportunities Fund’s portfolio has benefited from holding stocks that we believe will be positively impacted by the program. For example, Hong Kong Exchanges & Clearing’s share price rose dramatically on the news and we have since sold the shares, taking advantage of the price movement. CITIC Securities, still held in the portfolio, is another beneficiary. The company is a leading broker in China and last year acquired CLSA, a leading Hong Kong brokerage firm. It is thus well-positioned for flows in both directions.
Opinion column by Charlie Awdry, Portfolio Manager of the China Opportunities strategy, at Henderson Global Investors