Main­land, HK mar­kets set to lead the pack in 2017

Ex­perts up­beat on shares rid­ing high on earn­ings re­bound, heavy liq­uid­ity

China Daily (Hong Kong) - - HK | BUSINESS - By DUAN TING in Hong Kong tingduan@chi­nadai­lyhk.com

Eq­uity mar­kets on both the Chi­nese main­land and in Hong Kong are poised to put up an im­pres­sive show next year, un­leash­ing a fresh re­gional rally and out­per­form­ing other emerg­ing mar­kets, an­a­lysts say.

Cen­tral to the big push will be the pe­riph­eral ef­fects of the newly launched Shen­zhen-Hong Kong Stock Con­nect — the sec­ond stock­strad­ing link be tween the SAR and the main­land — which will ac­cel­er­ate north­bound and south­bound fund in­flows, with in­vestors be­ing par tic ularly drawn to the mass of in­no­va­tion-themed en­ter­prises listed on the Shen­zhen bourse.

The Hong Kong and main­land stock mar­kets have seen a down­ward swing in the past few days, eras­ing last week’s gains pro­pelled by the kick-off of the sec­ond stocks “through train” on Dec 5. Main­land shares have shed about 3 per­cent since Fri­day to a one-month low as reg­u­la­tors moved to slash in­sur­ers’ risky share-pur­chas­ing and profit-tak­ing ac­tiv­i­ties that lever­aged on high-risk prod­ucts.

The Hong Kong mar­ket’s weak­ness has also been ex­ac­er­bated, to a cer­tain ex­tent, by ap­pre­hen­sion over the course of fu­ture re­la­tions be­tween the main­land and the United States after US Pres­i­dent-elect Don­ald Tr u m p t a k e s o f f i c e n e x t month.

John Woods, chief in­vest­ment of­fi­cer, A sia Pa­cific, at Credit Suisse, said that, de­spite the marke ts’ se tback lately, the main­land and Hong Kong bourses are set to lead a re­gional rally next year, lifted by a re­cover y in cor­po­rate earn­ings, a tt r a c t i v e v a l u a t i o n s a n d buoy­ant liq­uid­ity that will swell north­bound and south­bound fund in­flows un­der the Shen­zhen-Hong Kong stocks pro­gram.

Fr a n k B e n z i m r a , h e a d of A sia eq­uity strateg y at So­cie te G en­erale, be­lieves that main­land on­shore and o ff s h o r e e q u i t i e s a r e s t i l l be­ing traded at rather low val­u­a­tions and, next year, mar­kets should see main­land eq­ui­ties re­vers­ing their un­der­per­for­mance.

Specif­i­cally, for the Hong Ko n g s t o c k m a r k e t , C l i ff Zhao Wenli, chief strate­gist and deputy head of eq­uity re­search de­part­ment at China Mer­chants Se­cu­ri­ties (HK) Co Ltd, noted that the city’s bench­mark Hang Seng In­dex (HSI) has been scal­ing back from its peak reached in Oc­to­ber, and is likely to touch the bot­tom of 20,000 points around Fe­bru­ary next year by which time there would be an­other splash by south­bound in­vestors.

He e x p e c t s t h e H S I t o fluc tu­ate be tween 20,000 and 25,000 points, and the Hang Seng China En­ter­prises In­dex be­tween 8,500 and 11,500 points in 2017.

Kevin An­der­son, head of i nv e s t m e n t s , A s i a Pa c i f i c , at State Street Global Ad­vi­sors, said the launch of the Shen­zhen-Hong Kong con­nect has whet­ted in­ter­na­tional in­vestors’ appe tite for the main­land mar­ket, as the Shen­zhen bourse hosts a num­ber of con­sumer and do­mes­tic econ­omy-fo­cused com­pa­nies.

The new stocks trad­ing link will fur­ther strengthen the case for MSCI (Mor­gan S t a n l e y C a p i t a l In d e x ) t o in­clude A shares for a num­ber of rea­sons, ac­cord­ing to most an­a­lysts sur­veyed, although there’s still some more work to be done, such as im­prov­ing reg­u­la­tion poli­cies and in­vest­ment logic.

In an­tic­i­pa­tion of the US Fed­eral Re­serve (Fed) rais­ing in­ter­est rates once this week and twice for a to­tal of 0.5 per­cent by the end of next year, an­a­lysts reck­oned that the macro back­drop for Chi­nese main­land stocks in 2017 is likely to be dic­tated by two up­com­ing key po­lit­i­cal de­vel­op­ments — Trump’s inau­gu­ra­tion as the new US pres­i­dent on Jan 20 and the main­land’s lead­er­ship tran­si­tion, which is ex­pected to be com­pleted after the 19 th Na­tional Congress of the Com­mu­nist Party of China in Novem­ber next year.

Pe t e r S o , c o - h e a d o f re­search at CCB In­ter­na­tional Sec uri­ties Ltd (CCBIS), said he ex­pects to see most stocks surge in the first half of next year, with a grad­ual 8. 9 per­cent, year-on-year re­cov­ery in the HSI by late 2017. For the sec­ond half of n e x t y e a r, h i g h e r i n t e r e s t rates in the US and Hong Kong, cou­pled with a strong green­back, may cap the mar­ket up­side.

For Hong Kong and the main­land, CCBIS fa­vors stocks in the en­erg y and com­modi­ties, in­fra­struc­ture, health­care, con­sump­tion up­grade and TMT (tech­nol­ogy, me­dia and tele­com) sec­tors.

Global in­vest­ment bank Gold­man Sachs has set its sights on A shares in­stead of H shares, with its key themes be­ing ben­e­fi­cia­ries of re­fla­tion, re­silience in new econ­omy in China, SOE (Sta­te­owned en­ter­prise) re­form ben­e­fi­cia­ries, and ren­minbi de­pre­ci­a­tion win­ners.

Reg­u­la­tors had ear­lier pointed out that with the start of the lat­est stocks con­nect, there would be an IPO (ini­tial pub­lic of­fer­ing) link to be in­cluded in the mu­tual mar­ket.

Ac­cord­ing to fi­nan­cial ser­vices firm Ernst & Young (E&Y ), there would be 117 IPOs in Hong Kong for the whole of this year, rais­ing a to­tal of HK$196.1 bil­lion and sur­pass­ing other global IPO

Main­land on­shore and off­shore eq­ui­ties are still be­ing traded at rather low val­u­a­tions and, next year, mar­kets should see main­land eq­ui­ties re­vers­ing their un­der­per­for­mance.”

hubs in terms of funds raised although the num­ber of IPOs and the value of funds raised would be down 3 per­cent and 25 per­cent year-on-year, re­spec­tively.

The num­ber of IPOs and the amount of funds raised in the Growth En­ter­prise Mar­ket would hit a record high this year since its in­tro­duc­tion in 2003.

Ringo Choi, man­ag­ing part­ner for China South and Asia-Pa­cific IPO leade r a t E &Y, r e c ko n e d t h a t the Shen­zhen-Hong Kong stocks-trad­ing pro­gram and the po­ten­tial IPO con­nect will lure more in­vestors to buy H shares, thus boost­ing liq­uid­ity, but the im­pact on the Hong Kong IPO mar­ket would be lim­ited, ex­plain­ing that the vi­tal­ity of the IPO mar­ket re­lies mostly on val­u­a­tion and liq­uid­ity in the sec­ondary cap­i­tal mar­ket.

Fi­nan­cial sec­tors, in­clud­ing banks and se­cu­ri­ties and leas­ing com­pa­nies, ac­counted for 90 per­cent of the funds raised by the top 10 IPOs in 2016, and are es­ti­mated by E&Y to con­tinue as the lead­ing sec­tor next year.

As wor­ries grew over the like­li­hood of the US Fed kick­ing off the fresh round of its in­ter­est-rate hikes this week, the HSI eked out a gain of just slightly more than 13 points, or 0.06 per­cent, on Tues­day to close at 22,446.7, while the Hang Seng China E n t e r p r i s e s In d e x p u t o n 0.21 per­cent to 9,719.94.

The Shang­hai and Shen­zhen stock mar­kets saw a slight re­bound at the close of trad­ing, pick­ing up 0.07 per­cent and 0.29 per­cent, re­spec­tively.

DAVID PAUL MOR­RIS / BLOOMBERG

De­spite a down­ward swing in the past few days, the Chi­nese main­land and Hong Kong eq­uity mar­kets are seen to lead a re­gional rally next year, lifted by a re­cov­ery in cor­po­rate earn­ings, at­trac­tive val­u­a­tions and buoy­ant liq­uid­ity that will swell north­bound and south­bound fund in­flows un­der the Shen­zhen-Hong Kong stocks trad­ing pro­gram, ex­perts say.

MOR­RIS / BLOOMBERG DAVID PAUL

The Hong Kong bourse is likely to sur­pass other global IPO (ini­tial pub­lic of­fer­ing) hubs in terms of funds raised this year, ac­cord­ing to fi­nan­cial ser­vices group Ernst & Young.

Frank Ben­z­imra, head of Asia eq­uity strat­egy at So­ci­ete Gen­erale

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