After generating lackluster returns for the year, Hong Kong-listed stocks and related exchange traded funds could surge on undervalued shares and improving economic growth.
Goldman Sachs projects that the Hang Seng China Enterprises Index, which is comprised of Chinese companies listed in Hong Kong, will jump 19% by the end of 2014, reports Laura He for MarketWatch.
“Chinese equities are about flat, year to date, have underperformed for much of the last several years,” Goldman’s analyst Noah Weisberger said in the report.
Weisberger added that Asia-focused funds are “significantly underweight” China, which “further suggests to us that very little ‘China upside’ has been priced.”
Additionally, Goldman points out that China’s political and economic reforms will help growth in China. The money manager estimates the Chinese economy will expand 7.8% in 2014, compared to this year’s expected growth of 7.7%. [November Reign for China ETFs]
However, the bank warned against further tightening of financial conditions in China.
Investors can gain exposure to Hong Kong-listed stocks through a couple of ETF options. The iShares MSCI Hong Kong ETF (NYSEArca: EWH) tracks large- and mid-cap stocks while the iShares MSCI Hong Kong Small-Cap ETF (NYSEArca: EWHS) covers small-cap companies. The First Trust Hong Kong AlphaDEX Fund (NYSEArca: FHK) follows a “smart-beta,” “enhanced” indexing methodology that select stocks based on growth factors, like 3-, 6- and 12-month price appreciation, sales to price and one year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets.
“Most Hong Kong companies have operations in China, so this fund can be used to gain exposure to growth trends on the Mainland,” Morningstar analyst Patricia Oey said about EWH.
Additionally, most China-related ETFs include stocks listed on Hong Kong exchanges. For instance, the iShares China Large-Cap ETF (NYSEArca: FXI) follows large-cap Chinese securities listed on the Hong Kong Stock Exchange.
For more information on Hong Kong, visit our Hong Kong category.
Max Chen contributed to this article.