Fund firms welcome Shenzhen opportunity

The opening up of China’s capital markets under the Shenzhen-Hong Kong Connect has been welcomed by fund management firms and one manager predicts Chinese investors will drive Hong Kong shares upwards in the near term.

However, economic concerns about China will continue to depress Shenzen shares, said Aidan Yao, senior emerging Asia economist at Axa Investment Managers.

“For the market, we expect offshore equities on balance to benefit more from further southbound flows [Shenzhen to Hong Kong] on foreign exchange diversification and value-hunting. Northbound flows, in contrast, could be hindered by on-going economic concerns and expensive valuations,” said Yao.

Expectations of an imminent announcement on the Shenzhen-Hong Kong Connect have spurred a decent rally in onshore/offshore equities in recent days, said Yao.

East Capital’s Francois Perrin, portfolio manager, and Karine Hirn, partner, expect that small-caps in Hong Kong will most likely benefit from inflows as Chinese investors seek to diversify, but will also see more volatility.

They also expect institutional investors to focus more on Shenzhen than Shanghai, where there is a similar stock connect system in operation. This is partly because there are far fewer state-owned enterprises in Shenzhen.

Perrin and Hirn add: “Within three months, the Shenzhen Connect will offer retail and institutional investors full access to one of the most attractive pools of investment opportunities in the world.”

A date for the Connect system launch is still to be set.

The Shanghai-Hong Kong Stock Connect opened in November 2014. Both stock market links represent the opening up of China’s economy, along with other measures such as the “QFII” project and the internationalisation of China’s renminbi.

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