Overseas funds favour rare species such as rare earths

After the opening of the Shanghai-Hong Kong Stock Connect, attention should be paid to the switching of capital market investment styles and valuation systems that Shanghai-Hong Kong Stock Connect may bring. Hong Kong market and international investors are favored by large consumer industries. Generally, the valuation of leading companies in various consumer sectors is around 25-35 times. Moreover, these leading companies have often entered a mature period, and the growth rate has dropped from a high level. Low growth interval. Among the Hong Kong-Hong Kong-capped species, besides Maotai and other liquor companies, rare metals, rare earths, and small metals in the non-ferrous metals sector are scarce varieties of A-shares and Hong Kong stocks. They are developing new materials and high-tech emerging technologies in the country. Against the background, it has a relatively high investment value.

A shares open their doors overseas funds favor scarce varieties

At present, both institutional investors and individual investors are still enthusiastic about Shanghai-Hong Kong Stock Connect. Brokers expect that the Shanghai-Hong Kong Stock Connect will be the source of the A-shares in the short-term, raising the valuation center of the A-shares. It will help change the investment pattern of the A-shares in the long-term and boost the internationalization of the capital market.

Overseas investment bankers believe that the Shanghai and Hong Kong markets are interconnected, creating an overall market with the second largest global market value, which is attractive to overseas investors. In the A-share market, the sector with scarce value and the blue-chip stocks with low valuations deserve attention.

Overseas funds A-share stocks are expected to increase significantly

Industrial Securities pointed out that since the “Shanghai-Hong Kong Stock Connect” message was announced in April, with the advancement of various preparatory work, overseas funds have been prepared in advance. Looking at the largest South A50RQFII**, especially in the second quarter and the third quarter, with the expectation that China's economic stability has entered the “new normal”, there has been a large number of net purchases in successive months. Due to the postponement of the "Shanghai-Hong Kong Stock Connect", the inflow of capital has declined since October. With the Shanghai-Hong Kong Stock Connect setting sail, the influx of overseas funds is expected to reappear. In addition, at present, there are nearly 950 billion offshore stocks in Hong Kong, and the opening of the Shanghai-Hong Kong Stock Connect will provide some momentum for the return of offshore funds, especially the blue-chip stocks with high dividend yields and high dividends in Shanghai Stock Exchange. At the same time, low-cost offshore funds entering the mainland through the Shanghai-Hong Kong Stock Connect approach will also help improve the cost of the real economy in the Mainland, reduce risk-free interest rates, and gradually increase the level of interest spread between the two places. It is also good for the valuation of A-shares to increase.

Shenyin Wanguo Securities also expressed its expectation for overseas incremental funds to enter the A-share market. Shenyin Wanguo Securities pointed out that the reform and opening up of the capital market is a general trend and a step toward internationalization. With the gradual realization of Shanghai-Hong Kong Stock Connect and possibly possible mutual recognition of China and Hong Kong, and the inclusion of A-shares into the MSCI Index, the neutrality assumptions ultimately increase the incremental funds for A-shares to 8000-120 billion yuan. *** .

Chen Li, chief strategist at UBS Securities, said after the Shanghai-Hong Kong Stock Connect, overseas capital is expected to continue to flow into the A-share market. In June next year, some important index companies such as MSCI will discuss again whether to include A shares in the international index. Once A shares enter these indices, large international public funds will have to pay attention to A shares. At the same time, as the internationalization of *** accelerates, if *** is converted freely before the end of 2020, the weight of A shares in the international index will gradually increase from the initial “small” to “significant.”

Chen Li predicted that after one year, the stock market value of international investors in the A-share market will rise from the current 350 billion yuan to more than 900 billion ***, accounting for more than 8% of the total market capitalization. Chen Li also reminded that the positive impact of the Shanghai-Hong Kong Stock Connect for A shares may be relatively limited at the beginning of the opening. On the one hand, some mainland investment institutions that bought shares of Shanghai-Hong Kong Stock Connect in advance may take profits. During November, investors who are pursuing absolute returns may consider locking in earnings. On the other hand, because of some technical issues, such as liquidation and settlement, some large global public funds have difficulty in trading A shares immediately.

Liu Jinjin, chief strategist at Goldman Sachs China, believes that the Shanghai-Hong Kong Stock Connect plan has actually integrated the A-shares and Hong Kong stock market, creating a large-scale market with the market value ranked second in the world and the daily average transaction volume ranking third in the world. At present, as many as 70% of the assets of Chinese residents are real estate, and only 6% are stocks. Shanghai-Hong Kong Stock Connect will provide investors with diversified and diversified investment opportunities.

Nomura China Chief Investment Officer Liu Mingxuan believes that China’s capital market has been relatively fragmented. After the launch of the Shanghai-Hong Kong Stock Connect, overseas investors and mainland investors will see the segmentation market as a whole market. In the case that the stock indexes of the two cities have been at low levels for many years, the Shanghai-Hong Kong Stock Connect will promote a structural bull market in the two cities and increase the momentum of the stock exchanges on both markets.

Liu Mingyi expects that the MSCI China Alum Index may reach around 70 at the end of the year and is currently at about 63 points. Judging from the valuation and economic trend, overseas investors will be willing to buy quality stocks in A shares as long as there is no particularly large downside risk.

Internationalization of capital markets will accelerate

Apart from attracting overseas funds to participate in A-shares in the short-term, most brokerages believe that this will be an important step in the internationalization of China’s capital market, and the impact of Shanghai-Hong Kong Stock Connect is particularly promising. Northeast Securities (Marketing, Interview) pointed out that Shanghai-Hong Kong Stock Connect is important in promoting the development of the capital markets of the two places and the internationalization of the two countries, which is conducive to the integration of domestic and overseas Chinese assets and the enhancement of the synergies between Shanghai and Hong Kong stock markets. For the Mainland, the capital market is relatively independent of the international capital market. Although it can avoid the impact of international hot money to a certain extent, it also restricts the mature development of the capital market in the Mainland. At the same time, the A-shares' pricing is divorced from the international financial market environment. The risk may not be effectively released if the valuation is “fighting the lake”; for Hong Kong stocks, linkage with A-shares will increase the ability of Hong Kong stocks to withstand the impact of international capital and increase the stability of Hong Kong stocks.

Everbright Securities (Quotes, Interviews) said that the Shanghai-Hong Kong Stock Connect is not only a catalyst for the short-term market, but also one of the policy dividends that will attract funds to invest in China and reassess the A-share market in the medium to long-term, and will also affect or even change China's mainland stock market. The investment structure. As the cooperation model of the two exchanges, Shanghai Stock Exchange is an optimal transitional institutional arrangement before China’s capital projects are fully open to the outside world, and the benefits to China’s A-share market have only just begun. First of all, Shanghai-Hong Kong Stock Connect has found a legal way to invest and maintain value for the offshore market. As of July 2014, only *** deposits in Hong Kong reached RMB 936.7 billion, an increase of 34.7% year-on-year. The deposits in Taiwan and Singapore have exceeded RMB 250 billion. In the future, A-shares will become an important investment target for large overseas companies. Second, compared with the history of the international market and the mainland, the A-share market is at the bottom of the valuation. Valuation and rising dividends provide a higher margin of safety. Thirty-three overseas exchanges have signed a capital cooperation memorandum with the Shanghai Stock Exchange. Finally, through the Shanghai-Hong Kong Stock Connect, the A-shares will further accelerate the process of incorporating global benchmarks such as MSCI.

Scarce varieties still attract attention

Goldman Sachs analysts believe that in the A-share market, some sectors with scarce value are worthy of attention, such as the liquor section not on the Hong Kong market. It is also worth noting that the QFIIs hold positions, because usually these stocks have already passed the bottom-up analysis of relevant institutions, confirming that they are in line with the valuation framework of international investors.

In addition, attention may be paid to stocks with high correlation with GDP growth, AH stocks, and higher yields and stable dividend growth.

Liu Mingyao of Nomura also stated that overseas investors are interested in some relatively low-valued and relatively scarce stocks. In particular, long-term funds have a very high demand for the allocation of blue chip stocks in A-share large cap stocks. The first reason is that the valuation of A-share blue-chip stocks is only half that of the S&P 500 index. Secondly, it is an economy as large as China. In terms of volume and trade volume, the proportion of overseas funds allocated to Chinese stocks is obviously low.

Liu Mingzhuo pointed out that China is transforming its economic growth model and that it is expected that the "new normal" sector and individual stocks are particularly concerned, including consumer-related goods and services, leisure travel, environmental protection, alternative energy, and technology.

Chen Li believes that overseas funds care about bottom-up stock options. Overseas large-scale ** hope to buy 5-10 stocks in Shanghai-Hong Kong Stock Connect for 1-2 years, focusing on consumer, pharmaceutical and TMT industries. UBS’s investment themes of Shanghai-Hong Kong Stock Connect includes reforms, market share enhancements, consumption upgrades, and policy support.