Stocks rally on news of Con­nect launch

Small cap stocks are ex­pected to ben­e­fit most, but rise is lim­ited by global un­cer­tain­ties

China Daily (USA) - - BUSINESS - By DUAN TING in Hong Kong tingduan@chi­nadai­

Both the Chi­nese main­land and the Hong Kong stock mar­kets saw a rally on Mon­day af­ter the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion (CSRC) con­firmed that the Shen­zhen-Hong Kong Stock Con­nect will be launched next Mon­day, but global mar­ket un­cer­tain­ties still held down per­for­mance, ac­cord­ing to ex­perts.

On Mon­day, the Shang­hai Com­pos­ite Index rose 15.05 points, 0.46 per­cent, to 3,277 and the Shen­zhen Com­po­nent Index in­creased 32.34, 0.29 per­cent, to 11,068.87. Hong Kong’s Heng Seng Com­pos­ite Index went up 107.12, 0.47, per­cent to 22,830.57 and the small-cap based Heng Seng China En­ter­prise Index jumped 85.31, 0.87 per­cent, to 9,875.54.

Han­nah Li Wai-han, a strate­gist at UOB Kay Hian (Hong Kong) Ltd, said that since the news of the sec­ond stock con­nect was di­gested by the mar­ket four months ago, the in­crease in mar­kets to­day is within ex­pec­ta­tion, with global un­cer­tain­ties sup­press­ing the over­all rise. She pre­dicts the Hong Kong bench­mark index will fluc­tu­ate around 24,000, in the best sce­nario. Small cap stocks in health­care, new en­ergy and in­ter­net sec­tors in the Hong Kong mar­ket should es­pe­cially ben­e­fit from the sec­ond stock con­nect.

Ac­cord­ing to Jerry Xie Weiyu, se­nior strate­gist at SWS Re­search Co Ltd, the im­pact of the stock con­nect in the medium and long term is def­i­nitely pro­found. He af­firms the as­set al­lo­ca­tion of large in­sur­ance in­sti­tu­tions and pub­licly-of­fered funds in the main­land will sup­port the Hong Kong mar­ket due to south­bound fund flows. And, due to the rel­a­tively low val­u­a­tion of the Hong Kong mar­ket, it will fi­nally out­per­form the Chi­nese main­land eq­uity mar­kets next year.

How­ever, Xie elab­o­rated, in the short run north­bound fund flows will ex­ceed the south­bound af­ter the sec­ond stock con­nect of­fi­cially opens up, be­cause the mar­ginal in­cre­ment in a rel­a­tively closed mar­ket like A-shares will ini­tially be larger than in an open mar­ket. The newly in­cluded medium and small­cap stocks in Shen­zhen are at­trac­tive and are dif­fer­ent from the large com­pany stocks made avail­able ear­lier by the Shang­hai-Hong Kong stock con­nect.

Ac­cord­ing to Steven Sun, an eq­uity strate­gist at HSBC Hold­ings Plc, north­bound fund flows could reach $500 bil­lion in five to ten years. So, the con­nect sig­nif­i­cantly strength­ens the case for the MSCI index to in­clude A-shares. With the 100 per­cent in­clu­sion of A-shares in the MSCI Index, which is likely to hap­pen in the next five to ten years, it is es­ti­mated that for­eign fund in­flows could reach $500 bil­lion, around 3.5 tril­lion yuan, which is roughly 10 per­cent of the ex­ist­ing A-share free float.

Jensen Liang Jinxin, as­sis­tant an­a­lyst at the over­seas re­search depart­ment of SWS Re­search Co Ltd, said the im­pact of the sec­ond stock con­nect on the Hong Kong stock mar­ket and the rev­enue of bro­ker­ages is lim­ited in the short term, but, in the medium and long term, it will im­prove the qual­ity and liq­uid­ity of small-cap stocks, as Chi­nese main­land in­vestors fa­vor small-caps.

0.46 per­cent the rise of the bench­mark Shang­hai Com­pos­ite Index on Mon­day

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