One driver for Hong Kong-listed stocks is southbound flows from the Stock Connect scheme, which now includes the tri-market link of Hong Kong, Shanghai and Shenzhen.
Southbound flow accounted for 12-13% of the turnover on the Hong Kong exchange in 2016, said BNPP IP.
Value Partners tips small and mid-cap companies in the SAR as one of the five top investment themes. “The MSCI China Small Cap Index performance was around 7% below the MSCI China Large Cap Index last year. With the Shenzhen-Hong Kong Stock Connect and related policies driving southbound investment flows, this is likely to boost trading volume of SME stocks and bolster their share price performance.”
Value Partners expects the southbound fund flow to increase by HK$200bn ($25.8bn, £21.1m, €24.4m) to HK$300bn in 2017. “The southbound capital is likely to be directed into high-dividend blue-chip stocks as they can serve as a hedge against the depreciation of the renminbi,” it said.
Louisa Lo, Schroders head of Greater China equities, is also positive on blue-chips. “From a valuation perspective, domestic names in the bank and commercial property sectors, as well as diversified regional and global conglomerates, look attractive today, on a longer-term view.
“Balance sheets for Hong Kong blue chips are typically very conservative, franchises robust, and management teams are well known to investors over many years,” she said.
Another theme is the potential MSCI inclusion of A-shares later this year.
“If MSCI passes a favorable decision (the probability for a June 2017 favorable decision has increased), it may also help the A-share market sentiment significantly,” said BNPP IP head of Greater China equities Caroline Yu Maurer.
Value Partners tips blue-chip A-share names ahead of the MSCI decision: “With increasing market expectation on MSCI’s inclusion of A-shares in June 2017, this will lead to revaluation opportunities for A-shares and benefit A-shares that are trading at a discount to H-shares, particularly blue-chip A-share names that are more preferred by foreign investors.”
Manulife AM Greater China equities senior portfolio manager Kai Kong Chay likies the cyclical sectors.
“We see opportunities in cement, coal and oil companies that we think are set to benefit from the continued rise in global commodity prices,” he said.
Chay also is looking at Shenzhen stocks.
“Opportunities in Shenzhen will be in national champions that are not listed in Hong Kong, specifically in sectors such as electrical appliances and healthcare,” he added.