The loosening of regulations to allow local mutual funds to invest through the southbound train of the Shanghai-Hong Kong Stock Connect led to a surge in Hong Kong share turnover in early April.
“We would be selective and continuously flexible looking forward, in terms of sector picking and choosing between A-and H-share investment opportunities,” said Helen Zhu, head of China equities at BlackRock.
BlackRock sees value in some H-share sectors such as mid-cap banks, property and utility companies.
However, the valuations of some Hong Kong-listed H-shares have now moved to levels that look excessive versus regional and global peers, Zhu said.
Accordingly, sectors like construction, capital goods, transport and energy have moved to less attractive valuations, she said.
“We prefer to be more selective and focus on those where we think valuations are still attractive on an absolute basis and relative to regional and global peers (rather than relative to A-shares only).”
Potential in small-caps
HSBC Global Asset Management recently said small-cap companies could be a possible investment theme due to the valuation gap between A-and H-shares.
There are 44 stocks in the Hong Kong-listed small cap space that are eligible for southbound investments and are trading at an average of 10 times the 2014 price-to-earning multiple, said Mandy Chan, head of Chinese and Hong Kong equities.
That compares with an average PE of 26 times for the northbound counterparts.
“We see an unjustified valuation gap between the Hong Kong-listed small-cap names and their A-share counterparts,” Chan said.
Further Hong Kong-listed small-cap opportunities should come after the expected launch of the Shenzhen-Hong Kong Stock Connect programme later this year.
Analysts expect the market link to open up further opportunities in areas such as technology and healthcare, including Chinese traditional medicine sector.
China and Hong Kong indices have continued to rise since 8 April, the day that turnover on the Hong Kong exchange reached an all-time high: