Momentum Turns in Favor of Hong Kong's Benchmark Hang Seng Index

The iShares China Large-Cap ETF (NYSEArca: FXI), the largest U.S.-listed exchange traded fund tracking Chinese stocks, is down 4.4% year-to-date, but FXI is trying to get back on track as highlighted by 7.7% surge over the past month.

Investors may want to revisit FXI and rival China ETFs that hold H-shares, or stocks trading in Hong Kong, because momentum is turning in favor of Hong Kong’s benchmark Hang Seng Index.

Chinese company stocks that trade in Hong Kong are not a perfect way of expressing views on China as there is a limited pipeline between Hong Kong and Shanghai, which restricts efficient arbitrage between the two markets. The two markets, though, are beginning to open up through the new stock connect program.

However, H-shares usually trade at steep discounts to A-shares, their mainland peers. A-shares trade at a 40% premium to their Hong Kong-listed H-shares counterparts – the Hang Seng China Enterprise Index shows one of the cheapest valuations in the world at six times expected earnings.

“Hong Kong stocks are showing signs of life. After the popping of China’s equity bubble last summer helped make the Hang Seng Index the worst performer among global developed peers with a 36 percent drop from peak to trough, the gauge has rallied 13 percent from February’s low. Momentum indicators are the highest in at least seven months, while casino, energy and property stocks, which led last year’s slump, are the vanguard of the rebound,” reports Kana Nishizawa for Bloomberg.