Tomorrow on Dec 5, 2016 the awaited Shenzhen-Hong Kong Connect
comes to life and foreign investors (expecting primarily fund managers) will be
able to access another Chinese stock exchange. General expectation are much
higher than for Shanghai-Hong Kong Connect as the Shanghai Stock Exchange lists
mainly stocks of state owned enterprises. More at (Part 1) link.
We also expect much higher interest from foreign
investors as the shares of more appealing names from so called “New economy” than
those listed in Shanghai are very likely to attract investors and speculators
from abroad.
Shenzhen stocks by
industry (Market cap %)
32% Manufacturing
25% Tech, media and telecom
18% Consumer goods and services
8% Pharma
5% Real estate and construction
5% Finance
3% Utilities and transportation
3% Other
Initial impact
-
Increase in trading volumes on Shenzhen Stock Exchange
that will be driven by new interest from hedge funds
-
A part of the new trading volume will come from flipping
foreign institutional portfolios from special institutional accounts to new
Connect accounts
-
Market should initially rise but some cautious will
be in place
Later on
-
The launch is positive for decision whether to
include Chinese stocks to MSCI indices, especially to those tracking Emerging markets
-
Such as step would attract additional investors
as hedge and mutual funds, pension funds and other types of speculators that
will relocate some parts of their portfolios in order to diversify and benefit
from new market opportunities. For example, only the index fund rebalancing and
including Chinese shares can bring additional USD 400 bln of new money to
Chinese stock markets.
Initial risks
-
Short-term volatility after the launch
-
Shenzhen listed stocks having high valuations
and PE ratios that may scare cautious investors:
Hang Seng Composite SmallCap
Index (Hong Kong) with PE at 11
Hang Seng Index with PE 12
ChiNext Composite Index (Chinese
equivalent to NASDAQ) with PE 58
Medium to longer
term risks investors should take a note of
-
Yuan depreciation
-
Availability of proper analysts coverage
-
Lack of credible and internationally recognized accounting
practices
-
Government regulation, political interference
and support of certain companies and industries
-
Different local standards, market surveillance and
actions from regulators
-
Prospects for economic growth
-
Confidence of domestic investors that is still a
bit unpredictable based on Western investors’ standards
-
Status of emerging market with all the pros and
cons that are topped with possibility of sudden capital inflows and outflows as
well as well-above average market volatility
On the other the door to another huge stock market is
getting opened what creates enormous amount of new opportunities that are
waiting to be discovered. The numbers tell the whole story:
-
As there are 417 shares listed on Hong Kong
Stocks Exchange while 881 on Shenzhen Stock Exchange
-
Also worth of mentioning that the market
capitalisation of combined Hong Kong, Shanghai and Shenzhen will be half of the
one of NYSE but higher than NASDAQ.
-
In other words, the combined market will rank as
the second in the world by market capitalisation
-
And with double the number of listed companies
than NYSE has.
Sounds like lots of new opportunities and tempting? Yes,
it does!
Good luck Champs!
Mr Hawk
DISCLAIMER: This material was created for informational
purposes only and represents the Land of Trading team’s view of the past and
current economic and capital market environment. It is not an investment advice
and should not be viewed that way at all, and the creators of this material
cannot be held liable for any potential losses resulting from trading, where
despite this disclaimer someone would consider this material as an investment
advice. All rights reserved ©2016. Contact: landoftradingATgmailDOTcom
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