Why have Hong Kong stocks experienced a sharp turnaround this year?
Portfolio diversification:
Mainland Chinese investors may have been investing in non-RMB denominated assets (e.g., HK-listed shares) to diversify potential RMB depreciation risk.
HKEX Expands Eligible stocks/ETFS Under Stock Connect
On April 19, 2024, China announced its plans to expand the list of stocks, REITs, and ETFs included in the Stock Connect program.
Currently, there are 24 listed companies participating in the yuan share trading counter program. These 24 listed companies may be added to the southbound Stock Connect. To put it simply, this means that mainland investors will be able to trade these 24 Hong Kong stocks in yuan in the future.
AH Premium:
A-shares are now 37% more expensive than their H-share equivalents. China is considering a proposal to exempt individual investors from paying dividend taxes on Hong Kong stocks bought via Stock Connect, according to people with knowledge of the matter. The said proposal may reduce the AH premium because A shares mainland Chinese investors do not need to pay dividend tax as long as they hold the said stock for more than 1 year. However, Chinese individual investors investing in Hong Kong-listed shares through the Southbound Stock Connect are currently required to pay a 20% income tax to the Mainland government when they receive dividends.
Inexpensive valuations:
The PE ratio for the Hang Seng index( $TRACKER FUND(02800)$ ) is trading at 9.45x relative to the S&P 500’s 21.57x.
Catch-up Play:
The Hang Seng index returned -13.8%, -15.5%, -14.1%, and -3.4% in 2023, 2022, 2021, and 2020, respectively. On the other hand, the S&P 500 returned +24.2%, -19.4%, +26.9%, and +16.3% in 2023, 2022, 2021, and 2020, respectively. Thus, I am not surprised that the Hang Seng is playing catch-up in performance this year.
Source: Bloomberg, 11 May 2024
While I reckon Hong Kong stocks may outperform US equities this year, historically, US equities have a better track record in building long-term wealth. Therefore, investors may consider allocating a higher proportion of their portfolio to the US equity market compared to Chinese equities.
Modify on 2024-05-13 10:49
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- Tigerwong·05-14Agreed ob the reasons and to add on, political influences is crutical to the valuation too and if thectrbsion beytween east and wamest subside upward mivenent will cobtinue in ztrength2Report