Jason Liu, head of Chief Investment Office (CIO) Asia at Deutsche Bank International Private Bank, says continuous corrections of Chinese stock markets in the last 12 months have lowered their valuations well below long-term averages.
That appears an opportune time for Chinese companies to announce share buyback plans and these announcements have supported the Hang Seng Index — up to a point. “As of March 29, Hong Kong’s benchmark Hang Seng Index was up 19.1% since reaching a six-year low on March 15. Hong Kong’s Hang Seng Tech Index was up 32.7% since its March 15 low. As of March 29, A-share markets were up a relatively modest 3.8% on average from their recent mid-March lows,” Liu says.
“On the share buyback front, historical evidence shows that China’s equities tend to react positively to share buyback announcements, at least in the short-term, especially the Chinese American depositary receipt (ADR) group. US-listed Chinese equities have reacted more positively than H-shares and A-shares. From a sector perspective, communication, services and materials have historically delivered the most positive stock price moves post buyback announcements,” Liu adds.
Year to date, more than 100 Hong Kong-listed companies have launched share buyback programmes. “As the China Securities Regulatory Commission explicitly is encouraging listed companies to conduct share buybacks, this trend will probably continue in the coming months, providing upside potential for Hong Kong-listed Chinese companies,” Liu says, adding that investors could take advantage of low valuations as well as of possible future temporary setbacks to gradually re-build their China positions. He acknowledges, though, that out performance in the near-term is unlikely.
Local investors can access Chinese stocks via ETFs. A proxy for large cap Chinese stocks is Lion-OCBC Securities China Leaders ETF (stock quote: YYY). It is trading at $1.815, after being sold down to $1.60 in mid-March. YYY was listed at $2. The chart pattern shows that prices are likely to remain resilient. However as prices have encountered resistance and have started to consolidate sideways, YYY may provide traders with only limited trading opportunities.
YYY provides investors with access to 80 largest Chinese companies like Ping An Insurance, Kweichow Moutai, Industrial and Commercial Bank of China (ICBC), Tencent Holdings and Chinese automobile and rechargeable battery manufacturer BYD. YYY attempts to replicate the performance of the Hang Seng Stock Connect China 80 Index investing directly in most of the underlying Index Securities. These 80 companies are listed in Hong Kong and mainland China that are eligible for Northbound or Southbound trading under the Stock Connect schemes.
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Those with a higher risk-appetite could take a look at Lion-OCBC Securities Hang Seng TECH Index ETF (HST). This ETF tracks the performance of the Hang Seng TECH Index. The ETF invests directly in the underlying tech Index Securities. The Hang Seng TECH Index tracks the 30 largest tech-themed companies listed in Hong Kong. HST made its debut at $1.36 in 2020 and last traded at 77.5 cents.
Week-on-week, HST was the top loser among ETFs and hence looks weaker than YYY. A selldown may provide traders the opportunity to punt this ETF.
Note though that market watchers such as Natixis SA, UBS, Nomura and NatWest Group are estimating that China’s GDP growth in 2022 could be approaching 4% which is a lot less than the 5.5% indicated by the government. For traders, the lower growth forecasts in China and regulatory issues may imply that the Chinese markets may remain volatile providing them with trading opportunities.
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