H-Shares Have Started Their Uptrend Trajectory

Both HK and China stocks should do well in first half of 2017 and HK stocks, especially H-shares, should perform better than stocks listed in Shanghai Stock Exchange. I can think of three reasons for my prediction.

1. Ants moving houses from Shanghai Stock Ex to HKEx

HK$ is pegged to US$ and it has strengthened rapidly alongside US$ in the past few months since the anticipation of Fed interest rates hike started. Conversely, Chinese yuan or RMB has weakened in the same period due to its massive outflow when China tycoons and businesses parked or invested their money in other countries, guessing that the China government would support the devaluation. However, the fact that the Chinese government has spent more than US$550 billion in 2016 to stave off attacks on RMB is showing its resolve not to let RMB depreciate too much or the confidence in the Chinese economy will be shattered.

As it is, RMB has depreciated against HK$ by 12 percent since July 2015. And all pundits are now predicting that RMB will keep weakening and the China government will have no choice but to try all means to stop the money from flowing out of the country as it is not helping their own economy now.

As it is, all China citizens are restricted by the existing rule to exchange a maximum of foreign currency equivalent to US$50k per year and this quota will be easily reached given that China is among the top few countries that have the highest savings. There have been rumours that China government will tighten the dollar-exchange limit. But with the new year just kicking in and China citizens being able to swop their RMB savings into US$50k again, you can expect China citizens will flock to their commercial banks to do this first thing in the morning. But what about the rest of the RMB cash hoard in excess of equivalent US$50k? What can the China speculators do to circumvent this?

One alternative is to buy H-shares through Shenzhen-HK Stock Connect or Shanghai-HK Stock Connect. When an investor does it this way, his action is not deemed as exchanging his RMB into US$. As H-shares are quoted in HK$ on HKEx, even if the share price of the stock he is buying does not rise subsequently, the investor may rest assured his money will not depreciate as HK$ is pegged to the strong US$.

On the last trading day of 2016, the money flowed from Shanghai Exchange to HKEx is a record RMB6.453 billion. You do not need a crystal ball to tell you that HK market will have a good start for 2017.

2. Smart Money will move to stock markets that have strengthening currencies  

In July 2014, I predicted that stocks listed on Shanghai Stock Exchange will start a bull run after the Shanghai Composite Index (SHCOMP) dropped from the peak of 6124 in October 2007 and hovered around 2000 in 2014 for a long time. 

At that time, only China citizens can invest in the cheaper A-shares and foreigners like me can try the equivalent H-shares listed on HKEx which is about 30+ percent more expensive. Then, in 2014, for the good dividend and very attractive p/e, I invested in China Construction Bank H-share (CCB, ticker: 939) , the second biggest China's bank in market cap, knowing very well that it is more expensive than its equivalent A-share listed on Shanghai Stock Exchange.

HK CCB H-share was more expensive than its A-share by 35% in 2014. And as the RMB was perceived as the strengthening currency and the China Chinese are more speculative after the launch of Shanghai-HK Stock Connect, CCB A-share became 14% more expensive than CCB H-share a year later in July 2015. That is, a 49% (35+14) gap in a year.

As the RMB has been perceived to be weakening since two months ago, the CCB H-share is only 2% cheaper now. Who knows CCB H-share will soon be, like the situation in July 2014, 35% more expensive than its A-share counterpart again?

As it is, A-shares generally still command a premium over their equivalent H-shares. The collective premium of A-shares over H-shares on the last trading day of 2016 is 22.35%.

My experience can tell you that currency risk assessment is important when you invest in any stock market. The time has come for us to wake up from our slumber to put money in H-shares if experience from history is anything to go by.

3. Fed will not raise interest rates in middle of March

In end of 2015 when Federal Reserve raised interest rates by 25 basic points for the first time after 7 years, Fed Chair Yellen informed that the interest rates would be raised four times in 2016. Lo and behold, it turned out that Fed only raised it once in 2016.

Given that the US$ has appreciated too fast and too furious against other major currencies within so short a time frame, it is in all probability that Fed will not raise rate more than twice in 2017 and the first one can only be in June, not March.  If that is so, the first quarter will be the best time for market players to invest in the HK bourse, especially in H-shares.

What stocks to invest?

Still the same stocks that I have recommended before in my blog. Good stocks will withstand the test of times. Prices quoted here are the closing prices on the last trading day in 2016:

1.     Emperor Capital (英皇證券, 717) – A brokerage with insider purchases, p=0.7, p/e=7.778x, yield=3.571%, p/b=1.11x

2.     Get Nice Hldg (结好控股, 0064) – A brokerage with insider purchases, p=0.265, p/e=3.786x, yield=7.547%, p/b=0.46x

3.     HS H ETF (恒生H股, 2828) - H-shares ETF, p=94.4, yield=3.284%, A/H=1.22x. Advantage of diversification and you may save some money on clearing fees too when you invest in ETFs in HKEx.

4.     HuanDian Power (华电国际电力, 1071) – Utility, p=3.51, p/e=3.722x, yield=10.057%, p/b=0.69x, A/H=1.5732x.

5.     HuanNeng Power (华能国际电力, 902) – Utility, p=5.14, p/e=4.647x, yield=10.759%, p/b=0.81x, A/H=1.5301x.

6.     Datang Power (大唐发电, 991) –Utility, p=2.03, p/e=8.219x, yield=9.852%, p/b=0.59x, A/H=2.0993x.

Two potential growth stocks with low p/e:

7.     Donfeng Motor (东风集团, 489) - Car manufacturer, p=7.57, p/e=4.8x, yield=3.104%, p/b=0.6x.

8.     China Saite (中国赛特, 153) - Steel Structure Constructor with a theme of One-Road-One-Belt. p=0.53, p/e=2.573x, yield=3.585%, p/b=0.49x.

英皇领头先开张
结好加油也跟上
囊中好股天天涨
喜笑颜开精神爽

I have parked my money in HK bourse, what about you?

Superphang

superphang@blogspot.sg