Hang Seng fever again carried by Shenzhen HK Connect

Hang Seng Index is carried away again by excitement over Shenzhen Hong Kong Connect or SZ-HK Connect. Again? Because the chart looks remarkably similar to H1 2015 when it was carried by Shanghai Hong Kong Connect or SHHK. History is repeating – without fundamentals to drive, speculation pumped the market up, speculation let the market down. We saw that from the SHHK action. This time the Hong Kong market is again driven by talk of SZ-HK. This is looking the same like last year. There is no explanation why the fundamentals are different/better this time. So again speculation will drive the market up and in time, speculation will let the market down all over again.


SHHK drove Hang Seng’s outperformance last year

Take a look at this chart of Hang Seng Futures overlaid with Singapore Index Futures/SiMSCI from 2010 until late-2015.

  • From 2010 – 2014, both indices showed strong positive correlation and delivered similar performance. This kind of correlation and performance is evident in other indices as well.
  • There was a period of divergence from late 2014 to mid 2015 followed by a steep convergence from Hang Seng after June 2015.
  • This coincided with the launch of Shanghai Hong Kong Connect on 17 November 2014 until it’s height in June 2015. When the feverish excitement burst, Hang Seng corrected to reality by re-joining SiMSCI.
Hang Seng Futures, SiMSCI overlay weekly chart from 2010 - present

Hang Seng Futures, SiMSCI overlay weekly chart from 2010 – present


Was there a fundamental reason to justify the SHHK-driven rally?

Investors must have thought so. Unfortunately Hang Seng Futures’ subsequent convergence with SiMSCI proves that whatever reason for that rally, it was either wrong or the whole was just very speculative and therefore doomed to be very short-lived.


This year’s SZHK setup looks remarkably similar

In my mind convergence of the two indices reaffirm their relationship. Therefore it is unlikely for Hang Seng to diverge from SiMSCI unless there is a strong fundamental driver.

What fundamentals cannot do, maybe speculation can.

  • From a brief low printed in May this year, Hang Seng Futures has taken off again to the current divergence and outperformance.
  • It looks suspiciously similar to last year.
  • Consider the ‘coincidence’ in timing when in March, China Securities Regulatory Commission or CSRC confirmed that SZ-HK will kick off in H2.

Fund managers and brokers welcomed official confirmation that the Shenzhen and Hong Kong stock connect scheme would launch in the second half of this year, citing a desire by both retail and institutional investors to participate in the smaller of the two mainland bourses.

Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said last week that the Shenzhen-Hong Kong stock connect programme would kick off in the second half of this year. It was the first time an official has publicly spoken about a launch time frame after the initiative was postponed from late last year due to the volatile market.

  • Consider that investors and speculators have no reason not to be excited at all with stories like this.

The much-anticipated share-trading link between Hong Kong’s and Shenzhen’s stock markets will “further strengthen Hong Kong’s status as an international financial centre”, the city’s financial chief said on Sunday morning.

Amid recent controversies sparked by Hong Kong independence advocates, John Tsang Chun-wah also said “deepening the city’s link” with mainland and global markets, and improving market infrastructure, were the only ways for the city to maintain “its unique role in China and around the world”.

So in my very cynical mind, Hong Kong wants to strengthen it’s status, China wants to “signal to outside world that the Chinese stock market is back to normal” which are entirely legitimate motivations but stock market participants will probably ignore last year’s painful lesson, decide to go in for a binge even if they believe that this might end up as a repeat of last year’s SHHK episode.


What to do?

Find a good setup ride the trend while it lasts. Be nimble, do whatever it takes to avoid the top. If /when this whole thing breaks, come back here for my ‘I told you so’ follow up. Speculation can push indices to feverish levels but for this time to be different, for Hang Seng to permanently divorce itself from it’s correlation to SiMSCI, there has to be really good fundamental reasons. If there are good reasons, I have not encountered yet.

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