Forex Marketz Daily Forex News – Fully Markets Update
The Shanghai-Hong Kong stock connect is getting ready to launch. It will be a catalyst for both of these markets but how can we benefit from this cross border equities link?
The Hong Kong Securities and Futures Commission issued a joint statement with the China Securities Regulatory Commission announcing the launch of this milestone on November 17. This scheme is also known as the “through train” which will make it easier for investors in both countries, as well as those abroad, to buy positions in local stocks.
This is a major step for China as it is making an effort to open its capital market to foreign investors. It will allow traders to buy and sell Shanghai A-shares using brokers in Hong Kong. Investors in China will use mainland brokers to buy and sell Hong Kong H-shares
The strategy is simple. A and H shares have a price difference couple that with what we call a scarcity trade, and that is how you will trade when the program launches. This involves buying companies listed on both exchanges as A-shares are discounted to their dual listed H-shares. You can also reverse this strategy for mainland stocks as well. We see big pricing differences throughout the trading sectors between H and A shares.
We are looking for Hong Kong H-shares to eventually catch up to the mainland counterparts. This industries include China’s airlines, railways, commodity firms and equipment manufacturers. These H-shares are trading up to a 25 percent discount right now. As for the scarcity trade, this comes when you pick stocks or sectors which can only be found on one of these two exchanges. Right off the bat investors from China will be able to access 200 Hong Kong stocks with a total market cap of over $2 trillion.
Technology firms like Lenovo (0992.HK) and Tenecent will benefit when they are added to Chinese firm like Sands China (1928.HK) and financial companies like Peoples Insurance Company of China.
The through-train scheme is expected to boost the Hong Kong exchange turnover by 38 percent by 2015. This means you should focus on companies that will benefit in increase trading volume. The Hong Kong Exchange and Clearing (HKEx) or CITIC Securities will be perfect when employing this strategy. Another company that will benefit is Haitong Securities making it good for this strategy.
The other big plus with integrating Hong Kong with China’s A-share market is that it will make it, eventually, the world’s largest global stock market. Right now the scheme is limited to Shanghai, but it will expand, over time, to China’s Shenzhen Exchange. This should happen within the next couple of years. If this happens then the combined market cap of these three exchanges will range from $7 trillion to a turnover of well of $9 trillion.
