The Shenzhen-Hong Kong Stock Connect, which launches on Dec 5, will benefit mid- and large-cap growth stocks in the long term, particularly those from consumption-driven sectors, said analysts.
The SZ-HK stock connect will cover 881 Shenzhen stocks and 102 Hong Kong stocks. Starting Dec 5, 76 percent of the A-share market cap and 87 percent of Hong Kong market cap will be mutually accessible.
The connect will see more northbound interest in mid- and large-cap growth stocks, according to Gao Ting, analyst with UBS Securities.
“The existing programs that allow overseas investors to invest in mainland markets, QFII/RQFII and the northbound Shanghai-Hong Kong Connect, show that outside investors have a clear preference for lower valuation mid- and large-caps in financials and traditional consumer sectors, such as foods and beverages, home appliances and autos,” said Gao in a latest research note.
Analysts said that overseas investors, many of whom are institutional investors, are focusing more on stable and steady yields instead of a short-term, speculative approach when trading A-shares, so they favor consumption-driven companies, particularly those playing a leading role in their respective field.
The Shenzhen market has a high concentration of technology stocks, 20 percent of its total market capital, offering a wide range of choices to investors with a strong interest in this fast-growing sector in China, said a research note from Haitong Securities.
Food and beverage players, such as Chinese white liquor (baijiu) makers, dairy goods makers, and snacks makers are also among investors’ favorite options.
Over the past 10 days since the launch of the SZ-HK stock connect was announced, share prices of leading companies in the food and beverage sector have risen over 5 percent. For instance, Wuliangye Yibin Company Limited gained more than 5.8 percent, from some 34 yuan ($4.94) per share to more than 36 yuan per share.
Analysts said companies in sectors which are rarely seen in Hong Kong are also likely to win overseas investors’ favor because they are supplementary to existing choices in Hong Kong’s market.
These sectors include machinery, defense-related high-tech, pharmaceuticals, and policy-driven trade and infrastructure players, including those that have benefited from the Belt and Road Initiative and countrywide urbanization.
Liu Xiaoning, analyst with Shenwan Hongyuan Securities, said that Shenzhen-listed companies that have significant market share and have disclosed winning bids for infrastructure projects are likely to realize stable and steady income and profits in the long run.
Overseas investors, however, may not decide to participate in the market immediately with large investments as they did when the Shanghai-Hong Kong Stock Connect was launched, because the overall situation of the A-share market is significantly different now, said analysts.
“When the Shanghai-Hong Kong Stock Connect was launched, the A-share market was so heated that few investors foresaw the risks of downward pressure. Investors, domestic and overseas, were quite bullish about the market and somehow less rational than they should have been. Regulations, market conditions, and compliance were not kept to as high standards as they are now. In short, the A-share market is now with more rational and value investors. There won’t be investors flocking toward the SZ-HK connect. More will patiently study, research, and make decisions,” said a research note from Ping An Securities.