Mainland China cash chasing Hong Kong stocks after record year

[HONG KONG] In a year disrupted by a global pandemic, political upheaval and abrupt setbacks for some of Hong Kong's biggest stocks, investors point to one constant as to why 2021 looks brighter: relentless levels of money coming in.

Mainland investors have bought a net HK$661 billion (S$112.97 billion) of the city's shares, easily the most since both of Hong Kong's trading links with onshore exchanges began operating in 2016.

At more than US$51 billion, the amount of capital raised from Hong Kong initial public offerings and secondary listings is the most in a decade, as the city positions itself to be the preferred venue for big Chinese firms.

The inflows have been so strong that Hong Kong's de-facto central bank had to repeatedly step in to weaken the local currency.

Together, the data explain why despite Hong Kong's worst stock underperformance in over two decades, some investors want more exposure to the world's fourth-largest market next year - whether it's in technology, property or financial services.

The confidence comes even as China's antitrust scrutiny casts a shadow over the nation's most powerful tech firms, with regulators investigating billionaire Jack Ma's Ant Group.

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"We believe the Chinese government is resolved to return stability in Hong Kong and would continue to support Hong Kong as its key financial hub," said Sean Taylor, Asia-Pacific chief investment officer at DWS Group.

He added the firm is looking to add more exposure to Hong Kong-listed stocks over mainland firms due to attractive valuations.

A proposal outlined last week by Hang Seng Indexes to increase the number of members in the city's stock benchmark and fast track new listings could also help boost daily turnover.

UNFETTERED

Hong Kong has this year been caught in the crossfire of fresh US-China political tensions, amplified by the sweeping national-security legislation imposed by Beijing.

That sparked the biggest stock crash in 12 years and raised concerns over possible capital outflows.

The Hang Seng Index benchmark has lost almost 6 per cent this year and is trading at its lowest level versus the MSCI All Country World Index since 1999. Only a third of Hang Seng components have risen in 2020.

But the broader market weakness has done little to quell interest in Hong Kong's booming IPO market, boosted by Chinese megacaps like JD.com and NetEase choosing to have secondary listings there.

The retail euphoria remained unfettered even after Ant's listing failure left investors in shock - with one deal as much as 422 times oversubscribed.

Zero2IPO, which was 1,394 times oversubscribed in the retail portion, opened 44 per cent higher than its IPO price on Wednesday, the last full trading day of 2020. There is already expectation the strength carries into 2021.

"Given Hong Kong is a mature market and has no capital controls, it will attract more Chinese companies to list there," said Hao Hong, managing director and head of research at Bocom International.

Further efforts to boost inflows could be coming. Hong Kong Exchanges & Clearing's outgoing chief executive officer Charles Li has said a link allowing mainland investors to buy bonds in Hong Kong will likely be unveiled next year.

Still, much of that rests on finding the right successor, with a search committee remaining split on whether to prioritise someone who can operate with confidence in China or one with a strong international background.

China's increasing role in Hong Kong's market could provide key support in years to come.

Mainland investors could account for 17 per cent of total market turnover in 2022, versus 11.7 per cent in 2018, say China Renaissance Securities analysts.

Beyond IPOs and inflows, market watchers have other areas to be upbeat about.

Morgan Stanley analysts turned bullish on Hong Kong property stocks earlier this month, citing cheap valuations, sustainable dividends and volume growth.

Hong Kong is also the brokerage's most preferred market in Asia when it comes to 5G, saying per-user revenue growth has been the highest in the region.

Meanwhile, Credit Suisse Group expects the Hang Seng Index to reach 30,000 points next year, 13 per cent above current levels and last seen in mid-2019, thanks to strong consumption-driven momentum for China's economy.

To be sure, regulatory risks in China continue to loom over the online sector's stocks, with nearly US$200 billion in value wiped out in recent days.

The uncertainty over US-China relations under a new US presidency may also be an overhang in 2021.

But that's not stopping bulls. Compared with mainland-listed equities, Hong Kong firms "still have a lot of room for growth," said Feng Zhang, a fund manager at Fullgoal Fund Management.

"There are many new companies in Hong Kong with relatively high growth potential. Funds are chasing these good companies."

BLOOMBERG