What's Hot On Stock Connect?

Stock Connect opened China's A-share markets to overseas investors, but which A-shares are the hottest amongst global investors, and what sectors do stock pickers favor? The China Equities team explains here.

byChina Equities team 14 oct 2019

What's Hot On Stock Connect? – in 60 seconds

  • As of September 23rd, 2019, a net RMB 832.7bn of overseas capital has moved into China A-shares via Stock Connect since November 14th 2014;
  • Baijiu companies have been the most popular stocks on northbound Stock Connect between September 2018 and August 2019;
  • At the sector-level, companies within consumer, financial and tech sectors dominated the top ten most popular stocks list on the northbound Stock Connect between September 2018 and August 20191.

How much capital have foreign investors invested in A-shares via Stock Connect?

RMB 832.7bn.

That's the net amount2 invested in China A-shares by foreign investors via Stock Connect between November 14, 2014 and September 23, 2019.

But total net inflows haven't been on a steady upward trend since the time Stock Connect started.

In the first two years of Stock Connect, foreign investors' net purchases hovered around a total of RMB 100bn.

But that all changed in 2017.

From the start of the year, the net amounts invested in China A-shares via Stock Connect accelerated, and we believe that's because of two key factors.

Firstly, Shenzhen-Hong Kong Stock Connect started in December 2016 and opened up a larger universe for foreign investors.

Secondly, MSCI announced on June 2017 that it would include A-shares in its benchmarks. That announcement triggered an increase in A-share buying that still continues, particularly as MSCI followed up in early 2019 by announcing it would accelerate the A-share inclusion process.

Net northbound A-share purchases by overseas investors (RMB billions), Nov 2014-Sep 2019

Source: Bloomberg, September 24, 2019

Which A-shares do overseas investors like most?

Baijiu stocks.

Baijiu companies Kweichou Moutai and Wuliangye Yibin are the top two shares measured by total buy volume on the Stock Connect northbound over the past year, attracting RMB 148.1bn and RMB 92.4bn, respectively, between September 2018 and the end of August 2019.

Baijiu companies are benefiting from fast-growing consumer demand in China, particularly for premium liquor brands. The above two companies are some of the most sought-after baijiu brands and are believed to have room to increase their sales prices in the future.

The top five A-shares on Stock Connect northbound

Sep 2018 - Aug 2019

Which sectors dominate the top 10 most popular stocks on northbound Stock Connect?

Every month, Hong Kong Exchange and Clearing publish the top 10 most popular stocks on Stock Connect.

Sector composition of Total Buying Volume for Top 10 Stocks on Stock Connect
Northbound, Sep 2018-Aug 2019

Source: Hong Kong Exchange & Clearing, September 2019

Looking over the top 10 stocks on the Stock Connect over the past year, a few key takeaways stand out:

  1. Large-cap stocks dominate: companies like Kweichow Moutai, Ping An Insurance, Jiangsu Hengrui and China Merchants Bank are some of the larger cap names in the China A-share markets;
  2. Consumer-related stocks are hot: Chinese consumer demand remains resilient, with ex-auto and online retail sales up 9.3% and 20.8% y-o-y8, respectively, YTD at the end of August 2019;
  3. Financials are close behind: Leaders in insurance (Ping An) and digital banking (China Merchants Bank) all feature prominently and persistently in the top ten;
  4. Tech and healthcare companies are also prominent: innovation is a key theme here, since Chinese tech and healthcare companies are investing heavily in R&D and delivering innovative products.

In part, these results are to be expected.

Index inclusion has brought many large-cap Chinese companies into MSCI's benchmarks, so their place in the top ten lists is hardly a surprise.

Also, consumer, financials, tech and healthcare are some of the fastest-growing sectors in the Chinese economy. Importantly, too, these sectors are driven by fundamental trends, like urbanization and innovation, which remain relatively shielded from the impact of US-China trade tensions.

In closing, however, the results also shine a light on the fact that overseas investors are taking advantage of the key benefits of Stock Connect. That's namely access to a wider range of investible opportunities onshore, particularly in fast-growing sectors like consumer and healthcare, than in those available offshore.

Thinking more strategically, the ability to cherry-pick the best opportunities in the A-share market via Stock Connect and also combine them with the best opportunities offshore add up to an important change in China's equity markets, and may well be the best way to capture China's growth story in the future.

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