Mainland funds may flow robustly to HK

Southbound fund flows, from the Chinese mainland to Hong Kong, are expected to grow steadily as investors focus on value investments, according to market analysts.

Geoffrey Wong, head of global emerging markets and Asia Pacific equities at UBS Asset Management, said the second stock connect will not cause an overnight boom of fund inflows, but will lead to a longer term building up process, unless the regulators quickly deregulate restrictions.

He added that foreign fund managers will be looking for some quality companies listed in Shenzhen. At the same time, the Hong Kong equity market will continue to attract southbound flows because some investors will want to switch from assets priced in the mainland's yuan, which has been depreciating in 2016, to assets denominated in the Hong Kong dollar, which is pegged to the US dollar.

He said he believes different types of investors are attracted to different asset classes and markets. The Shenzhen market will draw investors interested in the healthcare and internet sectors. The consumer sector attracts investors to the Shanghai market.

In A shares overall, Wong prefers the e-commerce, mobile internet, education, healthcare and insurance sectors, adding that A shares are quite policy-driven. So, restrictions on money flows and property purchases can change investment strategies. He thinks the old economy sectors are still challenging due to their ongoing reliance on reform. For H shares, he said the property and steel sectors will retrace a little after stimulative loosening of credit.

Wong said that UBS Asset Management is launching funds that make use of the northbound flows and allow foreign investors to access A shares. The company will also look for opportunities to launch products for domestic investors to invest through the southbound connects.

Jiang Youheng, chief strategist at Guotai Junan International Holdings Ltd, thinks the second connect is a big step. It facilitates the establishment of a brand new China stock market, which potentially has a market value of approximately 80 trillion yuan ($11.6 trillion).

Jiang believes 2017 will be a new start for Chinese equity markets due to fund inflows from the property and bond markets and the effects of reform. The southbound connect will have a greater impact due to the cheaper valuation of the Hong Kong market.

He expects the Hong Kong Composite Index to reach 26,000, the Hong Kong China Enterprise Index to hit 11,000, and the Shanghai Composite Index to touch 3,600 next year.

He added that investors' current chase for blue chip stocks in the Hong Kong market shows their investment preference for value investments, and he prefers companies with good and stable earnings. The second stock connect allows investors to reach small- and medium-cap stocks in Shenzhen.

For northbound investments, he still favors sectors relating to consumption upgrading, healthcare, TMT, and new energy, but pointed out that old economy sectors will probably outperform new economy sectors at a certain stage due to the effects of reform.