After sluggish trading in the last few weeks, the Hong Kong stock market has regained focus and the country’s major benchmark is hovering around its seven-year high. The strength came on the back of a surging Chinese market, and the new cross-border investment scheme announced in the weekend.
The new scheme would allow the sale of mutual funds domiciled in Hong Kong and China in each other’s market effective July 1. This would result in huge money inflows from the mainland to the Hong Kong market, and drive the stocks higher (read: Hong Kong Stocks Hit 7-Year High: 3 ETF to Watch).
The move came a few months after the launch of the Shanghai-Hong Kong Stock Connect program in November that allows direct trading of Shanghai shares by investors outside mainland China for the first time with an aggregate quota of 300 billion yuan ($47.9 billion). The mutual fund scheme when combined with this trading link program could increase the total flow to about $180 billion from China to the Hong Kong market, as per Goldman Sachs. Â
Further, the roll out of a new stock-connect program between Hong Kong and Shenzhen – in the pipeline for this year – will continue to fuel a rally in the Hong Kong stocks. To make the case stronger, the monetary policy easing spree in China, such as cuts in reserves requirement ratio and interest rates, and hopes for further acceleration in reforms will continue to build up momentum in the world’s second largest economy and the stocks (read: Fresh China Rate Cut Lifts A-Shares ETFs).
Apart from these, a continued solid-run in the mainland Chinese stocks make Hong Kong stocks attractive at the current levels. This is especially true given that the Shanghai Composite Index has rallied nearly 52% in the year-to-date timeframe while Hong Kong’s Hang Seng Index has risen only 20% in the same time frame. This has resulted in a massive discount for the Hong Kong stocks.
As the Chinese companies trading in Hong Kong try to catch up with their surging onshore counterparts, the gap between the two indices will narrow, pushing the Hong Kong shares higher. Given this and the bullish outlook, investors could tap this opportunity and make a play on the Hong Kong market through these three ETFs.
iShares MSCI Hong Kong ETF ((EWHÂ -Â ETF report))
This fund is by far the most popular and liquid ETF tracking the Hong Kong economy with AUM of over $3.6 billion and average daily volume of about 3.2 million shares. It follows the MSCI Hong Kong Index and charges 48 bps in fees per year from investors. In total, the fund holds 40 securities in its basket. It is heavily concentrated on the top firm – AIA Group (AIA) – at 17.6% while other firms hold less than 8.1% share (see: all the Developed Asia Pacific ETFs here).
From a sector look, real estate is the top sector at 30.3%, closely followed by insurance (17.6%) and utilities (11%). The ETF has gained 19.4% over the year-to-date period and has a Zacks ETF Rank of 2 or ‘Buy rating with a Medium risk outlook.
First Trust Hong Kong AlphaDEX Fund ((FHKÂ -Â ETF report))
