Hong Kong’s Stock Market Has Been on a Tear Recently: Is There More Room for Gains?

At its close on 9 April 2015, Hong Kong’s stock market benchmark, the Hang Seng Index, has jumped by 6.5% to 26,944 over just two days.

As if that spike wasn’t eye-catching enough, the 26,944 price level is actually the highest the Hang Sang Index’s been at since 2008.

Reasons behind the jump

Late last month, China’s securities regulator changed its rules and gave the greenlight for China-based mutual funds to invest in Hong Kong shares through the Shanghai-Hong Kong Stock Connect, a new trading link between the two cities’ stock exchanges that was introduced last November.

Prior to this, Chinese mutual funds had to obtain regulatory permission through the Qualified Domestic Institutional Investor programme before they could invest in stocks listed beyond China.

This tweak in the rules by China’s regulators could be the reason behind the revival of interest in Hong Kong stocks.

Capital flows data also lend support to this view. As the Wall Street Journal reports, capital flowing in from China to Hong Kong via the trading link on Wednesday had hit the daily limit of RMB10.5 billion for the first time since the link started.

There’s another great reason to believe that Chinese investors would really covet Hong Kong stocks: According to Reuters, companies that are dual-listed in both Shanghai and Hong Kong are on average 28% more expensive in China than in Hong Kong (as of 8 April). This gives Chinese investors arbitrage opportunities with the cheaper Hong Kong stocks.

The possibilities for more gains

With the Hang Seng Index at a seven-year high, it’s perhaps understandable for fears of an impending drop to bubble up. But, there are signs which may point toward further gains for Hong Kong’s stock market benchmark.

Valuation is one important sign. At the moment, the Hang Seng Index is valued at around 11 times earnings. In comparison, stocks in Shanghai have an average price-to-earnings ratio of some 21; in Singapore, the SPDR STI ETF (SGX: ES3), an exchange-traded fund (ETF) tracking the Straits Times Index (SGX: ^STI), has a PE of 14. Hence, despite its recent run-up, the Hang Seng Index can still be considered as relatively cheap.

What all these mean for Singapore investors

For those in Singapore who believe that brighter days are ahead for Hong Kong’s stock market, there are a few ways to gain access.

One is through purchasing Hong Kong shares directly through a brokerage account (there are many brokerages here in Singapore that allow their clients to invest in Hong Kong-listed shares); another’s through the Lyxor ETF Hong Kong (SGX: A9B), an ETF which tracks the Hang Seng Index.

As a final note, it is important that investors perform their own due diligence as different people may derive different conclusions based on the same information.

To keep up to date on the latest financial and stock market news and how they can affect us as investors in Singapore, sign up for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can GROW your wealth in the years ahead. Also, like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.