Southbound activities will gradually pick up in the next few years and bolster the Hong Kong stock market, according to a UBS report.
Some investors might have underestimated the potential market impact of southbound flow (investment from the Chinese mainland to Hong Kong stock market) on the Hong Kong market, citing low ownership share of southbound flow, said Spencer Leung, a UBS analyst, on Monday.
The ownership of southbound flow will only increase slightly to 3.8 percent by the end of 2020 from 2.3 percent currently, but the investment logic and valuation methods that A-share investors have adopted will apply to the Hong Kong market, he said.
The very high turnover of southbound flow will boost the turnover of the Hong Kong equity market, leading the latter to become more momentum driven, he said.
The annualized turnover for cross-connect stocks will reach 70 percent and 80 percent by the end of 2019, compared with 57 percent in July this year and the overall market valuation will pick up as well, he said.
Non-southbound fund managers typically turn their entire portfolio once every two years, whereas southbound fund managers are 8.6 times faster, on average, than their non-southbound counterparts and often turn their entire portfolio a number of times a year, he said.
The Shanghai-Hong Kong Stock Connect was launched in late 2014 and the Shenzhen-Hong Kong Stock Connect in late 2016.
Southbound flow currently contributes around 16 percent of the trading volume of all the cross-connect stocks (about 87 percent of the Hong Kong equity market) and the figure is up from 12.5 percent in January this year, according to the report.