Source:
http://www.sharesinv.com/
Link:
http://www.sharesinv.com/articles/2014/0...l-benefit/
The Shanghai-Hong Kong Linkup, Which Shares Will Benefit?
DR CHAN YAN CHONG | 05 SEPTEMBER 2014
The economic situation in Europe is taking a turn for the worse, yet the Ukrainian crisis has put the European Union (EU) in a dilemma — it has to crank up economic sanctions against Russia, but Russia is certain to retaliate with counter-sanctions.
Rumours have been circulating in the market that the European Central Bank will follow the example of the US in implementing quantitative easing and printing massive amount of money. One of the most important reasons for the grim situation in Europe today is its contradictory economic policies. The Euro debt crisis a few years ago was started by the indiscriminate spending of several Southern Europe governments, which led to the collapse of the demand for the bonds they issued. As part of the EU, these governments could not print their own money. Faced with imminent bankruptcy, they therefore had to accept Germany’s demand to implement austerity measures in their countries in exchange for German economic aid. However, these austerity measures had led to a serious economic recession today, and unemployment rate had increased substantially.
Despite the negativity that is shrouding the Western markets, not all is lost. With the linkup between Shanghai and Hong Kong bourses set to be launched in another month, Hong Kong and international investors can buy a selection of shares listed on the Shanghai Stock Exchange. Similarly, investors in mainland China can use this linkup to buy some of the shares listed on the Hong Kong Stock Exchange. This has given rise to the term “Shanghai-Hong Kong linkup concept stocks” in the Hong Kong stock market, which refers to shares that stand to benefit from the trading of Hong Kong and Shanghai shares offered through the linkup.
Regulations limit Chinese investors to invest only in large and medium-sized enterprises on the Hang Seng Index (HSI) through the linkup. Even so, this includes well over 200 counters from a wide variety of industries. So, which of these counters can look forward to a rally on the back of the linkup fever? Which of them are the hot favourites of the Chinese investors?
There are basically two types of linkup concept stocks — stocks that stand to gain a healthy profit from the Shanghai-Hong Kong bourse linkup, which would likely translate into higher share prices; and stocks that would attract Chinese investors when the linkup goes live. As a result of such demands, the share prices of these counters will likely rise too. Although both types of stocks could push prices up, the former type of concept stocks is more lasting and stands to gain long-term benefits.
Foremost among counters that stand to profit from the Shanghai-Hong Kong linkup is the Hong Kong Stock Exchange (HKEx, 0388), followed by securities and brokerage stocks, and banking stocks. Shares that will attract Chinese investors and speculators include large blue chip counters with strong Hong Kong identity, and a number of mid-cap H-shares which are priced well below their A-shares counterparts.
Since the Shanghai-Hong Kong linkup was announced, many of these linkup concept stocks have gone through a few rounds of tumultuous speculations. Yet, the only consistent winner is the HKEx, which saw its share price rising steadily. Furthermore, some influential finance houses have predicted that HKEx shares will rise above HK$200. HKEx is in a brilliant strategic position, for it enjoys an effective monopoly with no other competition in Hong Kong. Regardless of the direction of trade on the Shanghai-Hong Kong linkup, the HKEx will make money, which makes it a better bet than brokerage stocks. The daily and total limits of the bourse linkup are calculated on a net amount basis, which is good from the perspective of the HKEx. There is still a large amount of funds in the market, and they are all waiting for a chance to pounce. In 2007, before Hong Kong shares could be traded on the mainland, the mere news of a possibility of such a linkup sent the share price of HKEx rocketing from HK$96 to HK$259 in just two months.
The Hong Kong stock market is different from the Chinese stock market, mainly because the driving force in the Hong Kong stock market is international financial institutions. When these influential players want to move the HSI, the prices of HSI component stocks with higher weightage will surely rise. That is why HSI giants like China Mobile (0941) and AIA (1299) will rise. I believe these big wigs will eventually cause share prices of HSBC Holdings (0005) to rise too.
Investors should always view investing in penny stocks as a sideline activity. Your main focus should always be the blue chips. On the day the Shanghai-Hong Kong linkup was announced, a number of second- and third-tier H-shares which were priced well below their A-shares counterparts saw a sudden surge which lasted only for one day. Those that have real staying power are the traditional big blue chips, which the media also referred to as “old economy stocks”. I believe that in the midst of the hype and interests over new economy stocks, these “old economy stocks” will be favoured by Chinese investors.
The Morgan Stanley Capital International (MSCI) Hong Kong index hit a record high, which goes to show the HSI’s failure to reach any new highs can be laid at the feet of the China H-shares. The immediate question now is, should we go for those H-shares that have fallen behind, or do we continue to pursue Hong Kong stocks that are testing new highs?
The Bank of China in Hong Kong stands head and shoulder above the other three state-owned Chinese banks in Hong Kong in terms of its size. Naturally, it has become the clearing bank for the Shanghai-Hong Kong linkup. Hong Kong shares will be transacted in Hong Kong dollars, which means when Chinese investors buy Hong Kong shares, they pay in Renminbi (RMB) which will then be converted into Hong Kong dollars and vice versa. Between a buy and a sell, two RMB and Hong Kong dollar exchanges would have taken place. This represents a huge profit potential for the clearing bank that is shadowed only by that of the HKEx. On the other hand, investors in Hong Kong who do not have any RMB will still need to exchange for it when they buy any Shanghai A-shares, but they could do at any bank and are not restricted to the Bank of China.
Even though the Shanghai-Hong Kong linkup does not affect the Singapore stock market directly, the Shanghai Composite Index hitting a new 15-month high will certainly give a boost to Singapore-listed China stocks, so investors may want to put some money there.
The Straits Times Index is facing considerable resistance, but there are no indications of a sudden plunge either. Be patient, wait for the index to find its direction, and do not ever sell out prematurely. In the meantime, you may want to examine Hong Kong stocks further for a possible ride on the Shanghai-Hong Kong linkup fever.
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