Southern Kowloon and Victoria, Hong Kong, 2014 (Source: Wikipedia)

Despite a 45% rally since the beginning of 2017, Bloomberg reports, Hong Kong’s benchmark Hang Seng index still trades at a 34% discount to MSCI’s global gauge. The index climbed 1.8% to 31,904.75 on Tuesday, surpassing the closing record reached in 2007.

  • Hong Kong stocks, cheaper than most major developed or emerging markets, have lagged behind since the financial crisis
  • Chinese stocks listed in Hong Kong are still cheaper than mainland-traded counterparts, helping to attract southbound flows from the stock connect link that opened in 2014.
  • “There will be new highs,” chief strategist at Bocom International, Hao Hong was quoted as saying. “As long as the valuation gap between A and H still exists, as long as the connect program is open, the money should come this way.”
  • The Hong Kong-listed large caps, dominated by financial firms, benefit more from later stages of economic cycle than US peers, Hong said.

As Asia Unhedged noted earlier today, the revaluation of Chinese financials is also a byproduct of Beijing’s risk-reduction efforts. The Hang Seng China Enterprises Index, which tracks Hong Kong-listed Chinese stocks, has climbed 9.2% through the first two weeks of the year. Chinese financial institutions accounted for more than two-thirds of that increase.