November 29, 2014    5 minute read

Mirror Equities: Shanghai – Hong Kong Stock Connect

   November 29, 2014    5 minute read

Mirror Equities: Shanghai – Hong Kong Stock Connect

Investing in the ‘right’ stocks within any equity market may be a complicated and challenging notion, particularly when one has to explore a relatively unfamiliar market that is colossal in size just like the Shanghai-Hong Kong-Stock-ConnectBy utilising the ‘Mirror Image’ to pick profitable stocks on the market born on November 17, 2014, may bear fruit.

 The “Through Train”

The “Stock Through Train” is a pilot scheme that links the stock markets in Shanghai (mainland China) and Hong Kong (under one country; two systems, Special Administrative Region, China). Under the scheme, local investors in Hong Kong and mainland China can trade and settle shares listed on the market via the exchange and clearing house in their home market. Both groups of investors will be using RMB as their medium of exchange. This notion thus enables first time investors from either markets to directly access the other market easily. 

For international investors, the Stock Connect represents a new opportunity to invest and benefit from the China’s growing economy because it gives access to 568 stocks on the Shanghai Stock Exchange (SSE). Prior to the introduction of this scheme, stocks listed under the SSE are likely to be under-focused within investors’ portfolios (2.1% in MSCI AC World Index). Now, investors around the world are given the opportunity to share and invest in the growing Chinese economy which currently takes up 12.3% of the global GDP. Thus, the scheme ultimately integrates China A and HK stocks, creating the second largest equity market globally by cap after NYSE and the third largest by cash turnover.

 The Symmetry 

To pick profitable stocks from this new market segment, the effect of Mirror Imaging between firms helps a lot in building up the geometric symmetry during the initial screening for investment.  For example, Baidu mirrors Google; Tencent mirrors Facebook; Alibaba mirrors Amazon, HP mirrors Lenovo, and of course Xiaomi (Apple in the East, nicknamed by New York Times) .  Under the same logic of mirror image, global investors can have access to A-share companies in a wide range of sectors whose stocks are traded only in the Shanghai Stock Exchange by picking up a mirror image in NYSE, NASDAQ, Euronext and London Stock Exchange, gaining a better insight in understanding and analyzing this unique market.

The Picks 

The Stock Connect enables global investors to access to companies in a wide range of sectors in the Chinese market, serving a domestic population of over 1.3 billion. Some picks worthy for further analysis are companies that correspond with such mirror companies.
Key focuses currently include industrial firms with military contracts, for instance North Navigation Control Technology (code: 600435), financial firms like Citic Securities (code: 600030), auto-maker firms like Shanghai Automotive Industry (code: 600104), health care firms like Fosun Pharmaceutical (code: 600196) and port management firms like Yingkou Port (code: 600317). 

The Stock Connect symbolizes a giant leap forward in the internationalisation of China. In fact, it is a truly a solid integration of the China market into the global economy and it should be in no way disregarded, if one is looking for growth and sustainable profits in an investment portfolio.

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