Are These Singapore-Listed Companies Going To Benefit From The Recent Hong Kong Market Rally?

If you have not noticed, the Hong Kong stock market has been on a tear lately.

After a slow start to the Shanghai-Hong Kong Stock Connect back in November 2014, the link-up between the two exchanges seem to be gaining ground now.

China’s securities regulator had changed some rules governing Chinese mutual funds on 27 March 2015, allowing the funds to purchase Hong Kong shares through the Stock Connect programme.

Since then, Hong Kong’s main market barometer, the Hang Seng Index, which includes many companies with operations in China, is up by close to 11%. At the time of writing (12:40 pm), the Hang Seng has put on some 0.9% for the day.

Given the strong rally that Hong Kong’s stock market has seen over the past few weeks, are there any implications that we can read into with regard to the future prospects of Hong Kong-related shares listed in Singapore?

Within our local market benchmark the Straits Times Index (SGX: ^STI), shares like Hutchison Port Hldg Trust (SGX: NS8U) and Hongkong Land Holdings Limited (SGX: H78) have large business interests in Hong Kong. For a wider scope, companies like Global Logistic Properties Ltd (SGX: MC0) and Wilmar International Limited (SGX: F34) count China as very important geographical markets.

Is there a possibility of some spill-over from the Hong Kong market’s effervescence onto those aforementioned companies?

In my opinion, the effects of the rally might only be contained within Hong Kong.

Regulations that restricted money flow between Hong Kong and the mainland in the past had resulted in the Hang Seng China Enterprise Index (a price index for H-Shares, companies listed in Hong Kong but which have operations in China) being priced at a significant discount to the Shanghai Composite Index.

At the moment, the Hang Seng China Enterprise Index has a price-to-earnings (PE) ratio of 10 while the selfsame figure for the Shanghai Composite Index is at 19.

With the relaxation of the rules governing the flow of funds from China to Hong Kong (as mentioned earlier), the rally in Hong Kong’s stock market seems likely to be a reflection of the market playing “catch up” to the Shanghai Composite Index instead of being a sign of an improvement in the business fundamentals in Hong Kong or China.

Foolish Summary

As such, the Singapore-listed companies mentioned above might not be able to enjoy any perks at all from the recent rally in Hong Kong.

In any case, the type of market rally Hong Kong’s seeing now is often unsustainable over the long-term and could be only a temporary occurrence. Investors might be better off focusing more on the business fundamentals of the companies they follow instead of predicting when the next random market rally such as the one Hong Kong’s seeing now will occur next.

To learn more about investing and to keep up to date on the latest financial and stock market news, sign up for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. 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 Stanley Lim owns Wilmar International Limited.