China’s newest stock connect sees foreigners beating index

Foreign investors have proved to be good stock pickers so far when it comes to their newest entry channel for Chinese stocks, but things may get rougher the rest of this year.

In the seven months since China started a trading link between Hong Kong and Shenzhen, the top purchases of overseas investors have been Hangzhou Hikvision Digital Technology Co., Gree Electric Appliances Inc. and Midea Group Co. Each of the three has risen more than 50 percent this year, as the Shenzhen Composite Index retreated 6 percent – one of the world’s worst performances in a year of record highs for many equity gauges.

With such big surges, analysts are warning about excessive valuations on the three. Other hurdles loom for investors in the final months of the year, including a potential economic slowdown and a once-in-five-years senior leadership gathering of the Communist Party.

“The buying was a little bit irrational – they are good stocks, but investors may have priced in too much earnings upside,” said Zhang Gang, a Central China Securities Holdings strategist based in Shanghai.

Overseas investors have purchased a net 104 billion yuan (USD15.4 billion) worth of stocks listed in the technology hub of Shenzhen as of Monday, since the trading link enabled them to buy the city’s stocks in December.

“These companies managed to establish their domestic champion positions and they will continue to strengthen their competitive advantage, leveraging their size,” said Francois Perrin, portfolio manager at East Capital Asia Ltd. in Hong Kong. “For long-term investors, they offer a safe access to the second-largest equity market in the world.” MDT/Bloomberg