The rally in Hong Kong shares is largely driven by the valuation gap in the A-shares (listed in China) and the H-shares (listed in Hong Kong), which has widened recently as the Shanghai Composite Index has risen over 90% since late June last year.
“We believe this valuation gap between select A- and H-shares, in an environment where regulators are gradually lowering the barriers to the Hong Kong market for mainland investors, is driving mainland fund inflows into the market,” the Asian equities team said in a recent market note.
Chinese investors are increasingly looking to capitalise on the price gaps between onshore and offshore markets.
According to the fund house, Thursday’s market rise took down the average premium of domestic-listed A-shares over Hong Kong-listed H-shares to 28% from 35%.
“With the A-share market still rising in spite of weak economic data and poor company earnings in China, H-shares are becoming an increasingly attractive alternative.”
“However, valuations are generally starting to look expensive which makes us cautious about chasing some stocks.”
Market turnover on the Hong Kong Exchange rose to an all-time high of HK$252.4bn ($32.6bn) on Wednesday, as trading through the Shanghai-Hong Kong Stock Connect surged to its highest level since launching in November.
For the first time, the RMB10.5bn ($1.7bn) daily quota for southbound trading was also reached.
Investment in the Hong Kong market has spiked since the Chinese Securities Regulatory Commission allowed domestic mutual funds to invest in Hong Kong shares using the Stock Connect programme.