Hong Kong Stocks to Extend Rally on China"s Reforms

Hong Kong stocks will extend a rally

after touching a 2 1/2-year high on optimism for China’s biggest

package of policy changes since the 1990s and a stronger global

economy, according to investors from JPMorgan Asset Management

to Pictet Asset Management (HK) Ltd.

The benchmark Hang Seng Index (HSI) rose 0.4 percent to 23,881.29

today, its highest close since April 2011. The gauge jumped 3.7

percent since Nov. 15, when China’s Communist Party unveiled

reforms including easing the one-child policy and measures to

develop capital markets. Goldman Sachs Group Inc. raised its

rating on the nation’s stocks to overweight on Nov. 26, while

Credit Suisse Group AG said the equities are among its three top

recommendations.

“I see a stabilization of the Chinese economy, and all the

reforms coming out from the third plenum should support equities

in Hong Kong going into 2014,” said Tai Hui, Hong Kong-based

chief Asia market strategist at JPMorgan Asset Management, which

oversees about $1.5 trillion. “In the next 12 months I believe

there will be momentum driving Hong Kong equities. Hong Kong is

a very open economy, and improvements in the U.S. and Europe are

going to be supportive.”

The Hang Seng China Enterprises Index of mainland companies

listed in Hong Kong rose the most among major equity indexes

around the world from Nov. 15 through yesterday, climbing 6.4

percent with Citic Securities Co. (6030) leading gains. The policies

outlined by China’s leaders improve the outlook for brokerages

in the long term, Citigroup Inc. said.

Insurers Surge

China Life Insurance Co., the nation’s biggest insurer, and
Ping An Insurance (Group) Co. (2318) led advances on the Hang Seng

Index in the same period, with Credit Suisse saying the

government’s plans will promote market-based pricing and the

development of health and pension insurance.

Raw-milk producer China Modern Dairy Holdings Ltd. jumped

4.5 percent from Nov. 15 through yesterday, while China Mengniu

Dairy Co. (2319) rose 4.2 percent after policy makers pledged to allow

couples to have two children if either parent is an only child.

Seven of the 10 heaviest weightings on the Hang Seng Index

are Chinese companies, including Internet business Tencent

Holdings Ltd. and China Construction Bank Corp. Tencent surged

59 percent from its low this year on June 24 through yesterday,

while China Construction Bank climbed 23 percent.

“The convergence of views on Hong Kong and China over the

last couple of years has been very significant,” said Mark Konyn, the Hong Kong-based chief executive officer of Cathay

Conning Asset Management Ltd., which oversees about $83.5

billion. “It’s difficult for Hong Kong now to differentiate

overall in terms of sentiment from what’s going on in China in

the current environment.”

Economic Growth

The Hang Seng Index rose 5.4 percent this year, the

smallest developed-market gain after Singapore’s Straits Times

Index. Hong Kong shares sank in June to their lowest since

September 2012 as China’s money-market rates surged to a record

amid efforts to rein speculative lending.

China’s gross domestic product growth accelerated for the

first time in three quarters in the period ended September.

Premier Li Keqiang is “convinced” GDP will expand 7.5 percent

in 2013, according to a speech to the Romanian parliament this

week.

The Hang Seng Index traded at 11.4 times estimated earnings

as of yesterday. The H-share gauge traded at 8.39 times, the

second-cheapest in Asia after Pakistan’s Karachi Stock Exchange

100 index, according to data compiled by Bloomberg. The MSCI

Asia Pacific Index trades at 14 times, compared with 16.3 on the

Standard Poor’s 500 Index.

Global Investors

Hong Kong shares also climbed amid signs of recovery in the

U.S. and Europe. Data showed fewer Americans than projected

filed for unemployment last week, a sign of resilience in the

labor market. Germany business confidence this month rose to the

highest since April 2012 while euro-area manufacturing expanded

for a fifth month.

“Lots of investors have underweighted China so perceptions

of a more sustainable reform path is obviously going to

encourage global investors to get back in,” said Pauline Dan,

head of greater China equities at Pictet Asset Management (HK).

Pictet Asset manages about $151 billion globally. With a 2020

implementation target for reforms, “long term, we’re definitely

positive, short term we may see some bumps along the road.”

Momentum from China’s policy shift may be tempered by Hong

Kong’s property market. Prices have more than doubled since the

start of 2009 amid record-low interest rates and lack of supply,

prompting the government to impose extra taxes and tighten

lending restrictions. Barclays Plc sees prices declining at

least 30 percent by the end of 2015.

Currency Peg

With the city’s currency pegged to the dollar, the real-estate market will face pressure as the Federal Reserve prepares

to trim record stimulus, translating to higher interest rates

and mortgage costs, BlackRock Inc. said last month.

“Hong Kong and China will attract incremental flows at a

faster and higher rate than other markets in the region,” said

Cathay Conning Asset Management’s Konyn. Hong Kong is “a liquid

market, a well-functioning market that investors are very

familiar with and overall it will be the preference to play

China through Hong Kong.”

To contact the reporter on this story:

Kana Nishizawa in Hong Kong at

knishizawa5@bloomberg.net

To contact the editor responsible for this story:

Sarah McDonald at

smcdonald23@bloomberg.net

Enlarge image

HK STOCK EXCHANGE

Jerome Favre/Bloomberg

Stock traders sit at their desks on the trading floor of the Hong Kong Stock Exchange in Hong Kong. The Hang Seng Index rose 5.2 percent this year, the smallest developed-market gain after Singapore’s Straits Times Index.

Stock traders sit at their desks on the trading floor of the Hong Kong Stock Exchange in Hong Kong. The Hang Seng Index rose 5.2 percent this year, the smallest developed-market gain after Singapore’s Straits Times Index. Photographer: Jerome Favre/Bloomberg

Nov. 29 (Bloomberg) — Catherine Yeung, investment director for equities at Fidelity Investment Management Ltd. in Hong Kong, talks about China’s economy, government policies and stocks.

Yeung also talks about Japan’s economy and South Korean stocks. She speaks with Rishaad Salamat on Bloomberg Television’s “On the Move.” (Source: Bloomberg)

Hong Kong Stocks to Extend Rally on China"s Reforms