HONG KONG • Stock traders in Hong Kong are about to find out whether the US$7.1 trillion (S$9.5 trillion) market can hold its own without its biggest source of fund flows.
Starting today, trading links via Hong Kong's exchange operator allowing mainland traders to buy domestic stocks will halt through Feb 17 due to the Chinese New Year holiday. The stock connect closure will slam the brakes on record levels of inflows that helped propel Hong Kong's equities market to its best start to a year since 1985.
Investors north of the border turned bargain hunters late last year after valuations in some sectors onshore reached the highest in more than a decade. Mainland investors net bought a total of nearly US$48 billion worth of Hong Kong stocks in the first five weeks of this year, an amount that is already more than half of last year's total.
"We think it might be worthwhile to take some profit ahead of the trading link halt for stocks that are heavily boosted by southbound investors," including Tencent Holdings, Meituan and China Merchants Bank, said Mr Zhuang Jiapeng, a fund manager at Shenzhen JM Capital.
Still, the incentive to take money out of the market is low, given that people swopping investment ideas during the holidays could spur further gains when the links with Shenzhen and Shanghai reopen. Mr Zhuang said he is considering moving all of his fund's assets into Hong Kong at some point later this year, compared with his current 70 per cent exposure.
While the shutting of the links for Chinese New Year is an annual occurrence, traders are taking a closer look, given this year's unprecedented inflows.
Tencent, for example, has seen southbound turnover via the links account for about 42 per cent of the stock's average daily turnover so far this year, according to data compiled by Bloomberg.
Investors say longer-term exposure to Hong Kong is appealing, given the number of mutual funds piling into the city's assets. The financial hub is the venue for an increasing number of hot start-up listings and tech giants, including short-video platform Kuaishou Technology, which debuted last Friday. Also, Tencent Music Entertainment Group has selected banks to arrange its planned second listing in the city.
"Hong Kong stocks will remain attractive to mainlanders while outperformers in A-shares have skyrocketed and valuations are insane," said Hengsheng Asset Management fund manager Dai Ming, adding: "We are still just at the beginning of a long-term buying trend for Hong Kong stocks."