Bargain hunters looking to take advantage of a Chinese stock market rout that’s wiped out USD2.4 trillion in value since mid-June are casting their lots outside the mainland.
BlackRock Inc.’s $8.1 billion ETF tracking Hong Kong-listed Chinese companies lured $588 million last month, the second biggest inflow since December 2012. At the same time, investors pulled a record $337 million from the largest U.S. ETF investing in their mainland-listed equivalents.
While the Shanghai Composite Index’s 24 percent slump from its June 12 peak has sent investors fleeing, Hong Kong-listed securities, known as H-shares, are less vulnerable to the unwinding of leverage bets that’s helping fuel the rout, while their cheaper valuations provide better protection from further market slumps. Dual-listed companies are trading more than 20 percent cheaper in Hong Kong than on the mainland, data compiled by Bloomberg show.
“Investors are starting to see H-shares as representing good value relative to the excessive valuations of those other stocks,” Allan Conway, head of emerging market equities at Schroder Investment Management Ltd. in London, said by phone. “There will be some switching because of the valuation gap.”
The Shanghai benchmark posted the largest three-week decline since 1997 as government measures, including relaxing margin-trading rules and cutting transaction fees, failed to shore up confidence and keep leveraged traders from selling holdings to pay back the money they borrowed to buy shares. A five-fold surge in margin debt had helped propel the gauge up more than 150 percent in the 12 months through June 12.
While H-shares lagged in the run-up, they have fared better during the selloff. The Hang Seng China Enterprises Index has declined 8.6 percent in the past three weeks, trimming gains over the past year to 22 percent.
Even after the recent outperformance, Hong Kong-listed stocks are still trading at a 22 percent discount to their mainland counterparts, known as A-shares. They were at par as recently as in November.
“Investors feel safer investing in H-shares,” Clem Miller, an investment strategist at Wilmington Trust, which manages $20 billion, said by phone from Baltimore. The mainland market reflects “the whole fear-and-greed cycle,” he said. Ye Xie and Aleksandra Gjorgievska, Bloomberg
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