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Wednesday, November 19, 2014, 09:00

Profit takers take blame as shares keep heading south

By Xie Yu and Celia Chen in Hong Kong
Profit takers take blame as shares keep heading south
Traders monitor share movements during morning trading on the floor of the Hong Kong Stock Exchange in Central. (Roy liu / China Daily)

Share prices continued to fall in Hong Kong and Shanghai on Tuesday — the second day of the Stock Connect program’s debut — because of what analysts considered as “tactical” reasons, which have little bearing on the longer-term trend.

The benchmark Shanghai Composite Index slid 0.71 percent to close at 2,456.37 on Tuesday on a turnover of 174.7 billion yuan ($28.5 billion) — down from 199.3 billion yuan on Monday.

Only 38 percent of the 13.5-billion-yuan daily quota for buying Shanghai-listed A shares was utilized. On Monday, the entire quota was taken up within three hours after the market opened.

Meanwhile, mainland investors had taken up only 7.6 percent of the 10.5-billion-yuan daily quota for buying Hong Kong-listed H shares.

The slump in the prices of some big-cap shares helped drag the Hang Seng Index down by 1.13 percent to close at 23,529.17. Gaming stocks were the big losers with Galaxy Entertainment falling 3 percent.

Many so-called “Stock Connect concept stocks” were on the skid, led by the 2.3-percent fall in the share price of Hong Kong Exchanges and Clearing Ltd.

Stock analysts attributed the two bourses’ poor performance to profit taking. Many investors have been net buyers in Shanghai and Hong Kong during the rally that was triggered by the scheme’s announcement in April. Now, these investors are taking profits, analysts said.

“I believe many institutional investors have been building up some long positions in Shanghai before the Stock Connect started, and they are keen on profit-taking now,” said Eliot Li, director at First Shanghai Securities in Hong Kong.

The selling hit many stocks across all sectors. Shanghai-listed Inner Mongolia Yili Industrial Group slumped 5.19 percent. Haitong Securities and Bank of China dropped by 2.03 percent and 2.98 percent, respectively. Poly Real Estate Group fell 2.94 percent as new home prices fell in all but one mainland city monitored by the government last month.

Investors in both markets have remained cautious, waiting for the profit-taking wave to blow over before making an investment, Li said.

All the bullish factors arising from the Stock Connect program have been digested and absorbed, Li and others said. Investors have returned to the market fundamentals and some of them obviously aren’t too thrilled by what they found, analysts said. There is also a purely tactical play that influenced share prices. Stock analysts noted that some Hong Kong-based institutional investors have been unloading A-shares in their QFII (Qualified Foreign Institutional Investor) and RQFII (Renminbi Qualified Foreign Institutional Investor) accounts to free up funds for investing in fixed-income securities.

They aren’t leaving the stock market. Instead, they have been utilizing the Stock Connect quota to buy back some of the shares they have sold. The program precludes investment in anything other than the designated stocks listed in Hong Kong and Shanghai.

What’s more, costs, including the custodian fee for foreign investors, are lower when they buy shares under the Stock Connect program. The fees add considerably to the cost of buying shares through other channels.

The apparent failure of the Stock Connect program to whet the appetite of the army of retail investors in Shanghai didn’t come as much of a surprise to many stock analysts. It’s understandable that many Shanghai investors don’t feel confident enough to make the jump into Hong Kong stocks at this stage because they still aren’t familiar with the market practices and regulations, Li said.

 “I feel it would take time for them to warm up and become bolder on this market,” he added. When they do, they may find there’s no shortage of opportunities.

“We recommend that investors focus on A-share sector leaders and Hong Kong small caps. Both groups of stocks have underperformed in their respective markets since the Stock Connect was first announced, and both offer attractive valuations and growth,” Standard Chartered said in a report issued on Tuesday.

Ben Kwong Man-bun, KIG Asia chief operating officer, attributed the poor performance of the local bourse to the outflow of investment funds to the US and other overseas markets that are underlined by sustained economic recovery.

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