Through-train will draw capital to HK

IN a matter of weeks, a landmark event is scheduled to impact the capital markets of both Shanghai and Hong Kong: the through-train that will link qualified investors in these two financial centres, allowing them direct access to selected stocks on both exchanges, will be launched in October. Some commentary in the financial media has been muted, especially since the Shanghai-Hong Kong Stock Connect scheme was first mentioned as a possibility seven years ago. Furthermore, access mechanisms, such as QDII, QFII and RQFII already exist and are not slated to be shut down as the through-train opens for business. This begs the question - is the through-train indeed as important as some has maintained and does it, in isolation, help explain why both domestic China equities and Hong Kong-listed stocks have performed so well recently?

In short, we see both structural and cyclical reasons supporting the Hong Kong and China equity markets for the remainder of the year, at the minimum. The Connect scheme represents a structural driver that will help dispel, in our view, certain overhang that has lingered over local equity markets in China and Hong Kong. For example, since the end of 2012, a persistent theme in financial markets has been that developed stock markets (especially the United States) should be preferred over emerging markets. This phenomenon is validated in published mutual fund flow data.

According to Morgan Stanley, in 2011, dedicated emerging market funds saw outflows of US$46 billion, almost matching the enormous withdrawals seen during the global financial crisis in 2008. Asia-dedicated funds alone lost US$23.7 billion in 2011, whereas developed market funds were the clear beneficiary of this rebalancing of portfolios. China and Hong Kong were not immune to this rebalancing.