Dollars & Sense | Lessons from the mainland: Keep an eye on policy, profit through the Stock Connect

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Executives from the Hong Kong and Shanghai bourses and government officials toast the launch of the stock through train. Photo: Felix Wong

Published: 4:04pm, 28 Nov 2014

I have a particular fondness for train journeys, especially at this time of the year when I find myself drawn to model train sets winding their way around holiday villages in shopping malls.

But the train journey that has really grabbed my attention this last month is the northbound-southbound investor ride on the Shanghai-Hong Kong Stock Connect.

For weeks leading up to its official launch date last week, this particular through train was the talk of the town. Investors on the northbound journey even hit their trading limits on Day 1.

Why most of the traffic is headed north makes perfect sense. After all, Chinese stocks are cheap relative to their peers.

“If you are talking about fundamentals, the Shanghai Composite is now trading at nine times P/E whereas the Hang Seng is trading at something 10.3 times P/E,” said Dickie Wong, research director at Kingston Securities. “So if the stocks in Shanghai are trading so much lower than people are naturally thinking, why not buy in Shanghai?”

Now add to this the fact that the correlation between the Shanghai composite and the MSCI All-World Country index is 0.1, the lowest among major equity markets. That has to be good news for local investors looking to diversify their portfolios with Chinese stocks.

But Alex Wong, Director of asset management at Ample Capital believes that for longer term diversification, you have to get comfortable with the foreign exchange risk.