In The Post Li Xiaojia Era, How Can The Hong Kong Stock Market Continue To Attack?

Pang Ming, chief economist and chief strategic analyst of Huaxing securities (Hong Kong)

December 31, 2020 is Li Xiaojia's last day as chief executive of the Hong Kong stock exchange group. In the past 11 years, Li Xiaojia has repeatedly promoted major reforms in the Hong Kong Stock Exchange and the Hong Kong capital market. The Hong Kong Stock Exchange has successfully launched a series of interconnection products with the mainland market, such as the Shanghai Hong Kong stock connect, Shenzhen Hong Kong stock connect and bond link, which have won the recognition and praise of the market and domestic and foreign investors. In his departure diary, Li Xiaojia said that the Hong Kong Stock Exchange "will continue to serve as a translator and converter connecting the mainland's financial market with the international financial market, play an important role in China's economic development and financial openness, and enhance the competitiveness and attractiveness of Hong Kong's international financial center".

The ecology of the Hong Kong stock market has changed profoundly. Since the establishment of the trading interconnection mechanism between the mainland of China and Hong Kong, China, the trading scale has continued to grow. In 2020, the daily turnover records of Shanghai Shenzhen Hong Kong stock connect have been refreshed again and again. On July 7, 2020, the daily turnover of the north bound trading volume reached a historical high of 191.2 billion yuan, and the daily turnover of the south bound trading volume also reached a historical high of HK $60.2 billion on July 6, 2020.

Hong Kong has become an important node for foreign investors to enter the A-share market and the preferred destination for mainland investors to invest abroad. The total amount of mainland stocks held by Hong Kong and overseas investors through the northbound Shanghai Shenzhen Stock connect has surged from RMB 86.5 billion at the end of 2014 to more than RMB 2.1 trillion at present; meanwhile, the total amount of shares held by mainland investors investing in Hong Kong stocks through the southbound Hong Kong stock connect has also continued to rise, from HK $13.1 billion at the end of 2014 to HK $1.9 trillion, accounting for 4.2% of the total market value of Hong Kong stocks 。

Since the opening of the Shanghai Shenzhen Hong Kong stock connect, the northward capital has always been in a leading position, and the amount is far ahead of the South oriented Fund; however, recently, the net inflow of the southward fund has been recorded for 18 consecutive months and exceeded the scale of the northward fund in 2020. From the perspective of the scale of southward funds, since 2020, southward funds have accelerated to flow into the Hong Kong stock market, with a net inflow of more than 500 billion yuan, which has doubled compared with that in 2019, and is the highest since the opening of Shanghai Hong Kong stock connect and Shenzhen Hong Kong stock connect. From the perspective of southward capital flow, new economic sectors such as consumption, medicine, science and technology, communication and other industries are favored by investors.

In 2018, the Hong Kong Stock Exchange implemented the largest listing system reform in 25 years, which greatly stimulated the vitality, power and vitality of Hong Kong's capital market, and enhanced the competitiveness and attractiveness of Hong Kong as an international financial center. We expect more Chinese companies to list on the mainland or Hong Kong.

Mainland funds are expected to bring more live water. Benefiting from the development of Hong Kong stock connect and the increasing importance of mainland funds in the Hong Kong market, in 2018, 11.7% of the transaction amount of Hong Kong stock spot market came from mainland Chinese investors, which increased by 3% compared with that in 2016. The proportion of institutional investors increased from 28% in 2016 to 55.7% in 2018. Compared with local investors in Hong Kong, mainland investors are more active and turnover rate, which promotes the trading of Hong Kong stock market, especially the new economy Hong Kong stock market.

Thanks to the new listing rules of the Hong Kong stock exchange, more and more new economy companies are listed in Hong Kong, the Hang Seng index is optimized and adjusted, and the investment scope of Hong Kong stock connect is further expanded. More and more new economy companies are expected to be listed in Hong Kong. This will further enhance investors' interest in the Hong Kong stock market and the valuation level of core high-quality technology assets in Hong Kong stocks One step is to form a virtuous circle in which more new economy companies are listed in Hong Kong to raise funds

Assuming that in the next five years, 1% of the total deposits of mainland residents exceeding RMB 90 trillion will be used to increase the holdings of Hong Kong stocks, then the Hong Kong stock market is expected to record an annual capital inflow of RMB 150 billion to 250 billion in the next five years. The total amount of shares held by mainland investors investing in Hong Kong stocks through southbound Hong Kong stock connect, QFII and mutual fund recognition is expected to reach the total market value of Hong Kong stock market The turnover of mainland investors is expected to account for more than 25% of the total transaction volume of Hong Kong stock spot market.

We predict that the total transaction volume of Hong Kong stock spot market in 2022 will reach HK $41.9 trillion (2019: HK $21.4 trillion), with a compound growth rate of about 25% from 2019 to 2022. 17% of the transaction amount of Hong Kong stock spot market will come from mainland investors, which will increase by 5.3% compared with that in 2018. The compound growth rate of transaction volume of mainland investors from 2019 to 2022 will be about 40%.

We estimate that the market share of new economy companies in the Hong Kong market has increased from 33% to 45% in the past three years, and we expect that the share will continue to rise steadily to 55% or even higher in the next three to five years. In this process, funds are expected to continue to pursue new economic components of the stock.

Vertically, the forward-looking P / E ratio of Hang Seng index is 13.5 times, which is 2.0 standard deviation higher than its 5-year average value, and its valuation is high. However, horizontally, the valuation level of Hong Kong stock market measured by P / E ratio and P / B ratio is still at a low level compared with other major global stock markets and emerging markets. From a dynamic point of view, more and more leading Internet, technology and pharmaceutical companies representing the new direction of China's economy choose to list in Hong Kong.

The theme of new economy investment is still worthy of attention. In the situation of domestic economic recovery, cyclical stocks are favored by more investors. However, we believe that the trend and logic of science and technology, medicine and consumer market representing growth are still valid. Short term style switching does not mean the disappearance of core asset value. The market has not experienced the style switch from growth stocks to value stocks. Growth stocks and new economy sectors are expected to continue to win. The reasons include: first, we expect the current loose monetary policy and assets and liabilities of the Federal Reserve Second, under the situation that the two houses of Congress are divided into two parties, the total scale of the new round of financial assistance agreement and economic relief and stimulus plan is limited, which is not conducive to the performance of cyclical stocks; third, considering that the space for further easing by the Federal Reserve and major global economies is small, the profit recovery factor will become the subsequent rise of corporate stock prices Fourth, considering that China's policy will gradually return to the stable neutral, the market is likely to rotate from infrastructure related sectors and cyclical stocks to growth stocks and technology large cap stocks.

At present, new industries, new formats and new models account for about 16.3% of China's GDP, and its growth rate in 2019 is 9.3% based on current price, which is 1.5 percentage points higher than the current price growth rate of GDP in the same period. As a result, more and more new economy enterprises have gained due recognition in the capital market. The new economy stocks in the MSCI China index have increased by 1553% in the past decade (compared with the old economy stock index, which has only increased by 103%).

The state will continue to unswervingly rely on science and technology to promote economic transformation and stimulate domestic demand to enhance total factor productivity and maintain stable macroeconomic growth. Technology upgrading and consumption upgrading have penetrated into various fields. Therefore, in the long run, science and technology and consumption will continue to be the main line and field of investment with greater investment value. The "14th five year plan" is a historic investment opportunity and one of the most important theme investment opportunities in 2021. With the economic rebound, profit recovery and market sentiment stabilization after the superposition of the epidemic, the medium and long-term investment main line of science and technology and consumption is expected to be supported and strengthened. It is suggested that attention should be paid to pro cyclical industries in tactical configuration, while attention should be paid to science and technology, consumption and other industries in strategic allocation.

Based on its growth potential, favorable exchange rate trend and asset allocation demand of global investors, we are still optimistic about Chinese stocks in the medium and long term. We expect that the accelerating structural reform of the capital market will help reshape the investment pattern of Chinese stocks listed at home and abroad, and further revive market sentiment.

?