Hong Kong Gains Small Fry to Morgan Stanley Eyeing China Surge

(Bloomberg) -- To make real money this year on Chinese stocks, look beyond the Asia-leading surge we’re seeing in Hong Kong.

That’s the message from Morgan Stanley, whose chief Asia strategist is predicting Chinese shares back on the mainland will jump 42 percent in 2017, more than double the move he’s forecasting for the Hang Seng China Enterprises Index, the top-performing Asian equity measure so far this year.

“Generally in bull runs for China equities, A shares end up outperforming H shares,” Jonathan Garner, chief Asia and emerging-market equity strategist at the New York-based bank, said in an interview in Hong Kong on Thursday. “At some periods during rallies such as what we’ve had the last couple of weeks, H shares can move quicker than A and that’s happened because the southbound connect flows have been extremely strong since the start of the calendar year.”

H shares are blowing their mainland counterparts out of the water, with the Hang Seng Enterprises index’s 12 percent advance this year more than double the increase for the Shanghai Composite Index. The gains have been driven by mainland investors, who have flocked to cross-border trading programs as capital controls imposed to stem outflows and stabilize the yuan made Hong Kong’s stock market one of the few government-approved destinations offshore for Chinese to stow their cash. Automakers and consumer stocks have benefited as signs build China’s economic recovery is on a stronger footing.

“The whole environment is very different in relation to China equities than it was a year ago,” Garner said. “The growth situation has stabilized, the policy stimulus has been effective and the currency is also more stable.”

Garner is sticking to a forecast made in November for the Shanghai Composite to reach 4,400 by the end of the year. The index fell 0.3 percent Thursday to 3,251.38.

Chinese investors will rotate out of a bond market squeezed by official efforts to reduce leverage and into stocks, he said, adding that buying by domestic pension funds will also support mainland shares. The first batch of local pension equity portfolios have opened trading accounts with about 10 billion yuan ($1.45 billion) under management, and may start investing in stocks at the end of the month, Shanghai Securities News reported this week, citing a person it didn’t identify.

Morgan Stanley boosted its year-end target for the H-share gauge to 11,300 from its previous forecast of 10,200 in a report Wednesday, implying upside of about 7.4 percent from current levels. An improvement in company earnings and persistent demand from mainlanders will fuel those gains, Garner said.

The bank also increased its forecasts for the MSCI China index and the Hang Seng Index, saying the dollar is likely to appreciate less than expected against the yuan this year, easing the conversion drag on company earnings. Stronger-than-anticipated Chinese economic growth will also be supportive, Morgan Stanley analysts said in the note.

To contact the reporters on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net, Lisa Pham in Hong Kong at lpham14@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Emma O'Brien, Jeff Sutherland

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