Hong Kong and Shenzhen stocks will see some inflows soon. The stock connect program that was penciled in for earlier this year has yet to launch, but investors are still bullish, especially on small cap stocks.
“This is really the time to buy from a long-term investor’s perspective,” said Rahul Chadha, co-CIO of Mirae Asset Global Investments in Hong Kong.
Mirae knows their way around Asia Pacific equities. The firm has assets under management north of $82B USD. Moreover, they have been ranked as a top 20 Asia-Pac ex Japan institutional asset manager. Mr. Chadha went on to say that China is not experiencing the widely reported “hard landing”, so it’s a good time to get or stay long. Plus, with the Shenzhen (SZ) – Hong Kong (HK) stock connect launch looming, investors anticipate mutual inflows.
Being long is not always easy, but this is where stock loans can help. Opportunities like this are few and far between, so staying long is essential. To help leverage upside potential, investors should consider equity based loans. Investors keep their upside and simply use their stock in order to obtain a loan. Should the market turn up as expected, the interest cost will be far less than the capital growth from a rally.
When the SZ-HK stock connect launches, analysts are expecting mainland investors to converge upon high growth / high risk Hong Kong names in southbound trade flow.
Another catalyst for Asia-Pac capital growth could be the inclusion of China A Shares in MSCI’s global indices. Many of MSCI’s products will be under review in June and analysis are suggesting that there is a higher likelihood of A Share inclusion if the SZ-HK connect is live. This would ultimately cement the chance of bullish inflows.
Inflows will be taking advantage of cheap valuations according to Bloomberg. The firm just pointed out that stocks in Hong Kong are trading at a severe discount to their peers globally. A recent study indicated the average PE ratio in Hong Kong is at the same level of stocks in Russia or Pakistan. Around 10x earnings, Hong Kong valuations are at nearly half those of the U.K. and India.
With valuations so cheap, investors should be reluctant to sell. In addition to the factors previously mentioned, fundamentals ultimately drive investor behavior. So cheap valuations should keep investors in their trade…but with capital and leverage being used, it can be difficult to cover short term costs. Stock loans help in this regard, as they give portfolio managers the flexibility of cash, but still get to stay invested for the upside.