Hong Kong-listed Chinese shares look attractive, said Nomura Holdings in a 9 April report, a day after the securities market turnover reached an all-time high on the Hong Kong stock exchange.
“The rising valuation gap [between A- and H-shares] now makes Hong Kong-listed Chinese shares compelling bargains to onshore investors,” Nomura Holdings said.
On Wednesday, the daily quota also got exhausted for the first time as liquidity from Chinese investors flooded the Hong Kong market.
“Multiple groups of buyers may have together chased the market up, and ETF [exchange traded fund] investors played a role in it as activities under ETFs have picked up," the firm said.
“We understand that both retail and eligible institutional investors are buying ETFs tracking Hong Kong-listed stocks.”
A recent initiative by the Chinese regulators to allow local mutual funds to invest through the southbound train of the Shanghai-Hong Kong Connect has led to a surge in H-share (China funds listed in Hong Kong) investment.
“Apart from this catalyst, the valuation of Hong Kong stocks is currently at a very low level relative to both global equity markets and to the Hong Kong market historical average. Therefore, Hong Kong equities could continue to catch up,” said Luke Ng, vice president at FE Analytics.
However, one cannot rule out a rise in market volatility, Ng said.
“Going forward, Hong Kong equities could be more volatile as mainland investors are mainly dominated by retail investors and they tend to be more sentiment driven.”
Asset managers like Schroders believe the market momentum is not based on fundamentals and the rally in Hong Kong shares is largely driven by the valuation gap in the A-shares (listed in China) and H-shares.
Financial sector popularity
The portfolios of the top performing Hong Kong equity funds show that most have a significant allocation to the financial and industrial sectors.
“Among Hong Kong equity markets, the financial sector accounts for around 58% and 67% of the weighting of the Hang Seng and the Hang Seng China Enterprise indices, respectively. Therefore, the financial sector tends to have a higher portion among sectors in the portfolios.”
As for individual stocks, the most widely held names in portfolios are Tencent, China Mobile, Ping An Insurance and Industrial and Commercial Bank of China.
“These stocks are major constituents among most China and Hong Kong indices, so they tend to have bigger weightings in Hong Kong equity fund portfolios.”
Top performing funds -- Hong Kong Equity
Funds registered for sale in Singapore and/or Hong Kong with at least a three-year track record were considered for the list, which is based on FE data:
1. Manulife Dragon Growth Fund
The fund with $126.2m in assets under management topped the list.
The Luxembourg-domiciled was launched in December 1996. It aims to achieve capital growth by investing in companies listed on the Hong Kong exchange.
The fund's fact sheet on 28 February showed that the portfolio was skewed in favor of financial companies, which accounted for 43% of the fund’s assets. The information technology and industrial sectors were the next preferred bets with nearly 11% an 10% weighting, respectively in the portfolio.
China Mobile Limited (7.1%), Tencent Holdings (6.9%) and AIA Group (4.8%) were the top three stock holdings.
2. HSBC GIF Hong Kong Equity
The Luxembourg-based fund invests in companies established in Hong Kong or in shares of those companies that conduct most of their business in Hong Kong.
The fund has been in operation since January 1987 and had $214.5m in AUM on 28 February.
The financial (54.3%), industrial (10.9%) and information technology (6.8%) companies were the top three sectors.
The fund’s top holdings were in HSBC Holdings (6.8%), Tencent Holdings (5.6%) and Industrial and Commercial Bank of China (5.6%)
3. Allianz RCM Hong Kong
Launched in 2004, the Hong Kong-domiciled product had HK$5.3bn ($683.9m) in assets under management at the end of February.
The financial sector with a 47% weighting had the highest allocation in the portfolio followed by the industrial and telecommunication services, with each having a 12% weighting in the portfolio.
The fund’s top three holdings were in Ping An Insurance Group with a 6% weighting followed by Industrial and Commercial Bank of China and Sun Hung Kai Properties each with a 5% weighting.
4. Allianz Hong Kong Equity A
The Luxembourg product has been in operation since April 2010 and was managing €490.5m ($519.8m) in AUM on 28 February.
The financial sector had nearly a 44% allocation in the fund’s portfolio followed by the industrial (17%) and telecom services (14.3%).
Ping An Insurance, China Mobile and Tencent Holdings were the top three stock picks, with about 6% weighting in each.
5. AXA Institutional Hong Kong
The Hong Kong-based AXA vehicle has a track record since 1993 and managed $53.7 in AUM on 28 November 2014, as per the latest fact sheet available on FE Analytics.
The top stock picks of the fund were in Tencent Holdings, China Constriction Bank, Industrial and Commercial Bank with a 5.9%, 5.6%, and 5.2%, weighting respectively.
In terms of sector allocation, the financial (45.1%), industrial (14.3%) and energy (8.6%) companies dominated the fund’s portfolio.