Hong Kong stocks
may be Asia’s star performers this year, but it hasn’t done much to
revive the fortunes of the market’s perennial underdogs: small-cap
shares.
A
peek under the hood of the Hang Seng Index’s 25% surge shows it’s being
dominated by larger equities, with smaller companies trading at their
biggest price discount to the big caps since 2009. That’s despite
expectations a trading link between Hong Kong and Shenzhen set up in
December would lure mainland money into the former British colony’s
smaller shares.
For Hao Hong, the Bocom
International Holdings Co strategist who called China’s boom-and-bust
equity cycle in 2015, the lack of appetite for small caps comes down to
two things: the economy and short sellers.
There are signs China’s economic momentum is waning, read more here.
“In a slowing environment, big caps
tend to outperform,” he said, adding that they’re more liquid, often
have higher dividend yields and can be more transparent. “Investors are
avoiding small caps due to concerns about short selling - it seems that
short sellers are increasingly interested in small caps in Hong Kong.”
Short
sellers have taken on at least four Hong Kong-listed companies this
year, among them snack maker Dali Foods Group Co and furniture company
Man Wah Holdings Ltd, a target of well-known short-seller Carson Block.
According to Hong, there were only about two short targets a year in
Hong Kong before 2014, when the numbers started to pick up.
Small-cap
shares also bore the brunt of a selloff in June, when concern over
cross-shareholdings inflating their valuations spurred a cascade of
losses in a group of stocks.
“Fears about
increased short-selling activities around small caps in Hong Kong are
definitely part of the reason for investors avoiding small caps this
year,” said Francis Cheung, head of China-Hong Kong strategy at CLSA
Ltd.
Conversely,
money coming in to the market via exchange-traded funds and support
from China’s government-backed funds, known as the ‘national team,’ have
fuelled big-cap gains, Cheung said.
But
it’s been mainland investors which have propelled the wider Hang Seng’s
outperformance this year, as stricter capital controls make the stock
connects between Shanghai, Shenzhen and Hong Kong one of the only ways
those onshore can get their money into foreign currency.
Net
flows in to Hong Kong via the links have come in at more than 240
billion yuan (US$36bil) this year, versus 131 billion yuan for the same
period of 2016, when the Shenzhen connect didn’t exist.
While
onshore cash is still flocking to Hong Kong, small caps aren’t the
attraction. Of the top 10 stocks in which mainland investors hold the
highest stakes via the Shanghai and Shenzhen trading links, only two -
Guangzhou Baiyunshan Pharmaceutical Holdings Co and China Molybdenum Co
Ltd - are members of the Hang Seng small cap gauge.
Source :
1) www.thestar.com.my
2) Bloomberg
