Shenzhen and Hong Kong trade-link unlikely to boost Chinese markets: Fidelity

The long expected agreement between the Shenzhen and Hong Kong financial sectors is unlikely to boost Chinese markets, according to Fidelity Investments.

Yesterday China announced that the Shenzhen-Hong Kong Stock Connect has received government approval, paving the way for a better-regulated stock market and giving access to some of the region’s fastest rising technology companies.

“The preparation for the launch of Shenzhen-Hong Kong Stock Connect has been basically completed, and the State Council has approved its implementation plan,” Premier Li Keqiang told a China State Council executive meeting yesterday.

The Chinese premier said “all related parties have been holding high expectations” for the new initiative. Since its pilot at the end of 2014, the Shanghai-Hong Kong Stock Connect has withstood its market test, with steady and orderly overall performance. The program has achieved its expected targets, earning positive feedback from all related parties, leading to optimism for the latest roll out, Li Keying added in a statement released yesterday on its gov.cn website.

However, despite the planned launch of the Shenzhen-Hong Kong Stock Connect, being universally welcomed, it is unlikely to have a major impact on Chinese investments, according to Fidelity.

‘Positive news’

Raymond Ma, portfolio manager at Fidelity International welcomed the announcement as “positive news”, but also expects that the impact will not be strong enough to drive markets upwards.

“Shenzhen-Hong Kong Stock Connect is likely to further open up investment opportunities and also provide additional market liquidity,” said Ma. “However, as this news has been expected for quite some time, coupled with Shanghai-Hong Kong Stock Connect already being in operation, the news unlikely to be a strong catalyst for the market.”

And in an research article published on its website quoting various investment specialists, US investment giant Fidelity Investments said that it does not expect to see an immediate influx into Chinese markets, as many foreign investors have become skeptical of China, due to the recent disappointing flow of economic data and lack of structural reforms the government had pledged.

Nine consecutive weeks of outflows

As of early August, China-focused stock funds have posted outflows of nine consecutive weeks, making it one of the worst performing emerging markets, according to EPFR Global speaking to Fidelity’s research team.

The addition access to the Chinese market “is not going to have any impact on the fundamentals of Chinese companies, which continue to be quite poor,” according to Andrey Kutuzov, an associate portfolio manager at Wasatch Advisors, a Utah-based asset manager specialized in emerging markets. He said that earnings growth in China still lags behind markets such asIndia, Mexico and the Philippines.

Fidelity added that for some investors, the opening up of the Shenzhen market allows them to invest in the parts of a Chinese economy that are set to benefit from slower industrial and manufacturing growth. Nearly three quarters of Shenzhen-listed companies are in the “new economy” sectors, including service and technology, according to David Semple, who runs the US$1bn VanEck Emerging Markets fund. “There are a handful of stocks that we have identified that are interesting,” he told Fidelity.

ABOUT THE AUTHOR
Gary Robinson
Deputy Editor, International Investment and Head of Video at Open Door Media Publishing. A fully qualified journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as an IFA.

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