The China-Hong Kong securities sector has recently seen weak share-price performance on the back of the sharp A-share correction and dampened investor sentiment regarding its outlook. However, I am optimistic on the sector’s outlook in the medium-term, especially given the Chinese government’s strong intent and policies for stabilizing the market.

 

With the renminbi internationalization a clearly defined long-term strategic goal of the Chinese government, I believe the China/HK stock markets are poised to be beneficiaries. As we have seen with the Shanghai-HK Stock Connect, and the pending Shenzhen-HK Stock Connect, as well as gradual fine-tuning of existing schemes such as QDII, QFII and RQFII, the Chinese government is maintaining its goal of opening up the RMB and the A-share market, albeit at a moderate pace.

 

Given the expectations that A-shares might be included in the MSCI Emerging Markets Index in mid-2016, the pace of reform will need to accelerate in order to achieve this target. Once this becomes a reality, significant international inflows into the A-share market could be expected, which would bode well in the long-run for the China/Hong Kong market and the securities sector.

 

This would also allow the Chinese market to be seen as on par with international developed markets, and further open up cross-border regional and global business opportunities. It is imperative that the Chinese government does not allow the Chinese market to collapse and that it protects it at all costs. In my view, Hong Kong-based subsidiaries of domestic brokerages will be the key beneficiaries of such internationalization.

 

With the establishment of the Asian Infrastructure Investment Bank at end-2014, China’s ambition to become a global financial powerhouse is evident, and it is confident that it already possesses the capabilities to rival the likes of the IMF, the World Bank, which are dominated by developed countries.

 

 

Naturally, the next step is to transform the country’s leading financial institutions into globally-recognized franchises, which bodes well for large Chinese banks and brokerages. With solid customer bases, product offerings on the rise, and aided by the ambition of the Chinese government, this transformation will come true over time, with the potential winners likely to be the few established institutions already listed in Hong Kong. I am particularly optimistic on the securities sector, this is a major goal of the Chinese government to groom a select few capable leading domestic brokerages to become Chinese rivals of global investment banks.

 

The China/HK securities sector has significantly corrected in the last week, and is currently trading at an average of 1.4x FY15 P/B (excluding outliers). Current valuations for the sector are relatively undemanding. With the traditional investment theme of “riding the themes supported by the Chinese government, not going against the tide”, coupled with the aforementioned potential catalysts, I would suggest investors accumulate at current levels or any major dips. With a view that the A-share market does not face a long-term catastrophic fundamental collapse, but rather that the current correction is overdue and healthy for long-term development, we should be optimistic that there would be positive rewards for the sector. In addition to government support, individual companies in the sector buying back shares over the past few days are also a positive statement.

 

The likelihood of positive future developments for the securities sector has not changed and liquidity remains abundant, the current pull-back may present a golden opportunity for investors.