28/11/2016


The long-awaited Shenzhen-Hong Kong Stock Connect has finally debuted, but the excitement and passion of the market that was last year, when Shanghai-Hong Kong was launched, has long gone. No one was really expecting another rally, the market is as calm as it can be. However, we believe that as the depreciation of RMB deepens, Shenzhen-Hong Kong Stock Connect would have a positive effect on the Hong Kong stock market in the long term.

China’s Growing Capital Outflow

China’s economy is turning weak and the depreciation of RMB is accelerating the capital outflow from the country. After the RMB’s surprise drop against the USD by 1.9% on 11th Aug 2015, the downward trend has continued and has culminated in an 11% decline, to 6.9 RMB per US dollar. Statistics from the State Administration of Foreign Exchange showed that the foreign exchange reserve of China has already peaked in June 2014, and has started on a falling trend since then. It fell from US$3.99 trillion to US$3.12 trillion in November 2016, for more than 20%. Capital owners are seeking better investment opportunities abroad. For the last year, real estates, insurances and financial products in Hong Kong all see large demands from China. The amount of capital arriving at the territory through southbound Hong Kong Stock Connect has reached HK$22 billion per month. The inflow of funds is also apparent from the strong support for the Hong Kong dollar. For the last 6 months, Hong Kong dollars were exchanged at HK$7.75 for one US dollar, a clear sign of a growing influx of money.

We believe US rate hikes will keep speeding up the yuan depreciation. The currency rate would carry on its southward trend and money would keep seeking exits. However, we also believe the central Chinese government will continue cracking down on illicit currency outflow channels. With the permission from the China Securities Regulatory Commission, the Shenzhen-Hong Kong Stock Connect is expected to become a safe haven for onshore capitals.

What to Buy

The Shenzhen-Hong Kong Stock Connect adds 102 Hong Kong stocks to the list of companies that can be traded in mainland exchanges, broadening the choices for mainland investors. We suggest picking stocks with good fundamentals among those as long term investment targets. As the mainland investors are trying to mitigate the risk of RMB depreciation, the Hong Kong stock market is one of their choices. We believe China’s money will continue to come to Hong Kong and will be invested in leading enterprises or blue chips with global exposures. However, based on the experience from the Shanghai-Hong Kong Connect, we are not so optimistic about the broking sector. If we use the daily transaction volumes of the Shanghai-Hong Kong Connect as a reference for forecasting, it is clear that there is not going to be significant profits for the brokerage firms. As these stocks have already accumulated sizeable gains, we do not recommend buying at this moment, but rather we suggest taking profits.

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Frontier Capital Management Limited (“FCM”) is a subsidiary of Frontier Financial Group (“the Group”). It is regulated and licensed by Hong Kong Securities and Futures Commission, also is an Exchange Participant of The Stock Exchange of Hong Kong Limited, and a Direct Clearing Participant of Hong Kong Securities Clearing Company Limited.
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