Despite the unrest that has hobbled the local economy, investors may be looking at Hong Kong stocks and related ETFs for the relatively cheap valuations.
Investors from mainland China have already thrown about $20 billion into Hong Kong’s stock market in less than six months, the Wall Street Journal reports.
Net purchases through the Stock Connect program totaled HK$150 billion, or $19.17 billion, since the beginning of June when protests started to pop up. The purchases are small but still bolstered the Hong Kong stock market, which was worth HK$31.8 trillion at the end of October. The protests has not deterred investors from looking into Hong Kong as net buying has more than doubled to HK$194.8 billion so far this year compared to 2018 flows.
Bruce Pang, head of macro and strategy research at China Renaissance Securities (HK) Ltd., argued that many mainland clients could buy more Hong Kong-listed shares ahead.
“We see investor sentiment warming up remarkably—some believe there will be no further escalation of the Hong Kong unrest,” Pang said told the WSJ, citing recent meetings with investors on a roadshow.
Alex Au, managing director at Alphalex Capital Management, a hedge fund based in Hong Kong, believed that investors were becoming less sensitive to updates on protests and unrest in the city. He also added that more than half of listed stocks in Hong Kong were mainland companies. Shares of the same company can be priced significantly cheaper as mainland-listed stocks or A shares trade at an average 27% premium over equivalent securities listed in Hong Kong, according Hang Seng Indexes Co.
Valuations may also be a key motivator. For example, the iShares MSCI Hong Kong ETF (NYSEArca: EWH) is trading at 14.8 price-to-earnings and 1.2 price-to-book. Shares on Hong Kong’s main board traded at 11.2 times expected earnings, compared to an average 13.8 times in Shanghai and 24.9 times in Shenzhen, according to Hong Kong Exchanges and Clearing data.
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