The Good H-shares In Hong Kong Market Are the Gems In 2016

The 2015 GDP growth for the U.S. is 2%, for China 6.9%, for Singapore 2.1%, for Hong Kong 2.4%. So, it is obvious that China is the happening place. But what about the valuation of the stocks traded in respective bourses based on their average or collective price-earnings ratios (p/e)?

The trailing p/e of Dow Jones Industrial Average (DJIA) and S&P 500 is between 16x to 18x. The trailing p/e of Shanghai Composite Index (SHCOMP) is 16.3x, for Straits Times Index (STI) 12.1x, and for Hang Seng Index (HSI) about 10.4x.

SHCOMP is formed by all the stocks listed in the Shanghai Stock Exchange. These include about 1000 stocks and many bonds and other instruments. For HSI and STI, only 30 blue chips are included.

If we take only the blue chips listed in Shanghai Stock Exchange, the trailing p/e will only be around 10.5x. So, I have identified that high GDP growth happens in China and low p/e stocks are in Shanghai Stock Exchange. What else do you want?

However, some of these blue chips are also dual-listed in the Hong Kong Stock Exchange. Today, they are collectively around 31.9% cheaper than their counterparts listed in the Shanghai Stock Exchange, i.e., the collective trailing p/e of China blue chips listed in HK Exchange is only around 8x --- this is valuation at crisis level by whatever yardstick you may adopt. That is why value investors should place more emphasis on stocks listed in Hong Kong Stock Exchange.

Those dual-listed stocks in the Shanghai Exchange or Shenzhen and denominated in RMB are known as A-shares and those in the HK Exchange H-shares.

Yes, H-shares are what we should focus on. But what about the entry point? It is about now.

There are other reasons why we have to seriously take a look at H-shares at this crucial period.

1.       The probability of getting A-shares blue chips to be included in MSCI Index in this coming June is very high and this will boost the confidence of all market players in the China bourse. The p/e of A-shares blue chips should rebound from 10.5x to 13x and that will mean SHCOMP should reach 3600.

2.       MSCI index did not adopt A-shares blue-chips index in last June because of instability of the RMB and market accessibility issues. Most of the problems have since been largely resolved by the China Securities Regulatory Commission. Once the A-shares are added, prices of both A-shares and H-shares are expected to rise because many fund managers will have to buy them to add to their own funds and all exchange-traded funds that track the MSCI index will be forced to add those shares.

3.       The Shenzhen and HK Connect will surely be rolled out before the end of this year. This will increase market liquidity and brokerages and finance companies will benefit the most.

What you have to do is understand the H-shares and buy some of these gems before the sharks smell the blood.

Superphang

http://superphang.blogspot.sg