Hong Kong's Wild Ride
Ignoring Venezuela’s unprecedented Bolivar related performance, Chinese stocks are the world’s top performers. The Shanghai Composite has propelled higher by over 39%, compared to the 2% gain from the S&P 500 year to date. Thanks in part to strict ownership laws in China, as well as the recently established trading link, the Hong Kong equity markets have garnered much attention. The benchmark Hang Seng Index is up roughly 14% year to date.
Due to the unique structure of the Chinese equity markets, A-Shares are listed in China and largely available only to domestic investors. H-Shares on the other hand, are Chinese companies listed in Hong Kong and available to non-domestic investors. With strong momentum in place for the Chinese markets, analysts and traders are beginning to hone in on valuation spreads between the classes of shares.
The Hang Seng AH Premium Index is used to measure the spread between A-Shares and H-Shares of the same company dually listed on both exchanges. Despite the strong rally in Hong Kong, their A-Share counterparts are trading at high premiums not seen since 2011, according to the index
The premium gap presents an attractive opportunity for investors wanting to ride the coat tails of the strength in China but seeking more “attractive” valuations. Comparing the P/E Ratios of both the Hang Seng and the Shanghai Composite, Hong Kong stocks offer remarkably “cheaper” valuations by traditional metrics. With no shortage of global catalysts on the horizon (Central banks, Greece, etc), the premium gap will be worth monitoring.