How Long Will Mainland Money Love the Hang Seng?
(Bloomberg Opinion) -- Last week I was still mulling over how a sudden flood of mainland Chinese money was changing Hong Kong’s market composition. This week, the investors I called the amateurs at the gate were already in the city center, creating jaw-dropping headlines about the bourse’s most prominent blue-chip, Tencent Holdings Ltd. Thanks to them, the Hang Seng Index has returned 7.9% this year, outperforming the S&P 500 and China’s benchmark CSI 300 Index. Index heavyweight Tencent is up 27%.
If 2015 was any guide, the southbound money flow into Hong Kong through the Stock Connect — which links the city with mainland bourses in Shenzhen and Shanghai — can vanish as fast as it appeared. Back then, mainland investors gobbled up Hong Kong stocks in the first half of April, and then suddenly left, even though other market participants tried to revive trading that May and again in July. Will the mainlanders vanish again, taking animal spirits with them?
This time, they are coming for tech stocks. The appetite for Tencent, for instance, seems insatiable. Through Stock Connect, mainlanders now own 5.6% of its $889 billion market cap, versus 4.4% at the beginning of the year, or 2% a year ago. Even on Tuesday, when foreign investors took profits after Monday’s 11% surge, the Chinese still bought a net worth of HK$8.9 billion ($1.15 billion) worth of shares, exchange data show.
A couple of things are happening. First, the southbound traffic comes from professional fund managers in the mainland looking for better sector allocation. Take a look at the chart provided by Guosheng Securities. Of the 20 largest stocks in each sector, mainland bourses host most of the consumer discretionary names, such as Kweichow Moutai Co. They also own plenty of cyclical ones in steel and oil, as well as in the financial sector. The only thing they lack at home are technology stocks.
Secondly, this flow comes as China’s retail investors ditch stock day trading for mutual funds, which are experiencing a renaissance. In the first three weeks of January, the industry launched 35 new funds licensed to invest in the mainland as well as Hong Kong, raising 216.7 billion yuan. Via the Stock Connect, mainland Chinese now account for as much as one-third of the total turnover.
It’s become trendy for Chinese mutual funds to allocate some money to Hong Kong, as a way to differentiate their performance from peers. Back home, fund managers have been crowding into the same handful of growth-oriented blue-chips, driving their valuation to bubble-popping levels. As of the end of 2020, equity funds allocated 7.3% of their money to Hong Kong-listed shares, versus 3.6% as of June 2019, data provided by Guosheng Securities Co. show.
The current southbound flow has a very different feel from five years ago. Back in April 2015, drunk on stock euphoria, China’s day traders landed in Hong Kong simply for price arbitrage: Dual-listed shares were a lot cheaper in the south. They quickly left, however, once they discovered that the Hong Kong market was not half as liquid as the mainland.
Optimal sector allocation, on the other hand, is more of an art to manage because it is often at the whim of ever-shifting macro conditions. For example, if vaccines were successfully distributed and the world went back to normal, fund managers would have to rotate from growth to value stocks. That would mean they’d have to sell their tech holdings. Similarly, if Beijing talks up antitrust regulations — which would check the sector’s profit prospects — they will have to dump their Hong Kong shares. The southbound flow doesn’t promise to endure.
In recent days, there’s been quite a bit of discussion in Chinese media on whether mainlanders can be the new “price setters” in Hong Kong’s stock market. Perhaps. But it also spells uncertainty and volatility. The Hang Seng may no longer be boring. But is that a good thing?
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
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