HK Market Strategy Bi-weekly

HKD kept strengthening. The HKD closed at 7.7503 against the USD, being close to the strong-side convertibility undertaking of 7.500 for 8 consecutive days. If the situation persists, the HKMA may inject liquidity to the market, sending a strong signal that capital is flowing back to the territory. The lower valuation of HK shares has provided sufficient margin of safety. In addition, HKD can hedge certain FX risks as it is linked to the greenback.

    Capital flowed in via Shanghai-HK Stock Connect as negatives priced in. Apart from the net inflow of RMB298 mn last Friday, net outflow of nearly RMB40 bn through the Northbound Trading Link was recorded for the previous 9 trading days. In contrast, net inflow of capital via the Southbound Trading Link was recorded for 4 consecutive trading days after a few days following the stock crash in the mainland.

    AH Premium Index moved along highs. The AH Premium Index fell to 141.65 from the 6-year high of 154.11 last Friday. A shares are at a relatively higher premium of 41.65% against H shares. The index hit the record high at 213.47 and low at 85.01 during 2006-08, before the strong bullish period of the HK market in 2009. With improved market mechanism, more liberalized capital flows and a valuation of around 10x, the HK market should be at its historical low. Therefore, we believe the value of HK shares has become even better after the recent crash in the mainland, and the market will surge again in 3Q15 once catalysts such as SZ-HK Stock Connect and QDII2 realize.

    Investment advice:The advantages of the HK market have become more prominent after the recent crash in the mainland. With sufficient margin of safety, we expect divergence in the performances of individual sectors and stocks to increase in the upcoming interim results season. We recommend: 1) blue chips with low absolute valuation and high dividend yield, including Chinese banks, cyclicals, airlines, public utilities and consumption stocks with bottomed results; and 2) leaders in emerging industries with high profitability and transparency, mainly those in TMT, environmental and high-tech equipment manufacturing sectors.