Index inclusion of A-shares bears fruit for Stock Connect

With the flow of funds moving from Hong Kong to Shanghai now reaching record levels, the Stock Connect link up moves up a gear with northbound inflows gathering pace

The inclusion of A-shares in the MSCI index last May is beginning to bear fruit with record inflows from Hong Kong-based investors into Mainland China stocks, known as "northbound", posted in 2018 despite the poor performance of the A-share market.

The northbound share of total turnover gained as southbound's (inflows from Mainland investors to Hong Kong stocks) shrank. Further inclusion events in 2019 from MSCI, FTSE and S&P Dow Jones should support northbound inflows, according to a report from BNP Paribas.

Investors net-bought US$44.7 billion of onshore equities in 2018, close to US$15 billion more than 2017. Southbound buying, on the other hand, experienced a much slower pace of inflow after a strong start in the first quarter. For the year, southbound investors net-bought US$10.6 billion of HK-listed equities, or less than 25% of what they bought in 2017, according to the report.

"We estimate northbound now accounts for 5-10% of total A-share turnover, compared to around 1% at the beginning of 2017. Compared to overall A-share volume decreasing over the past four years, northbound turnover has gained significantly in 2018 due to MSCI inclusion of A-shares," says Chris Yung, equity and derivative strategist and Jason Lui, head of equity and derivative strategy, APAC for BNP Paribas Hong Kong Branch.

"In line with the slowing pace of net inflows, southbound turnover also decreased through 2018, causing the share of southbound turnover relative to cash equity (excluding warrants and CBBCs) to drop from 10-20% to 7-14%," adds Yung and Lui, who both prepared the report.

In 2018, northbound investors favoured consumer stocks, as five names out of the top 10 net-buying stocks were in consumer staples or discretionary, while southbound investors saw financial stocks comprising half of the top 10 names.

Investors also implemented A-H pair trades, where PingAn-A was the top net-buy stock, whilst PingAn-H was the second most net-sold stock through southbound. Tencent turned from being the top net-buying stock in H1 to the top net-selling name.

"As highlighted in our 2019 Asia Equity & Derivative Outlook (4 Dec 2018), assuming a 50% participation from active funds, we believe the total inflow may exceed US$36 billion for the index rebalancing events to be conducted by MSCI, FTSE Russell and S&P Dow Jones next year," says Yung and Lui.

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