HKEx Shares Surged

Yus-baby probably got all excited yesterday while watching the strong surge in the share price of HKEx, wondering whether there will be some rub-off onto Bursa shares. HKEx shares jumped 20.3% yesterday to close at HK$190.10 with 40m shares in volume traded.

The jump was due to information released that the HK Monetary Authority had collected a 5.88% stake in HKEx worth HK$9.93bn. Indications are the HKMA will continue to add to that stake. That adds to the already significant portfolio of HK shares under HKMA to nearly HK$160bn in value.

There are valid concerns over the HKMA holding such a huge block of HK shares. What started as a collective effort to support and/or invest has now mushroomed to a significant level. It is understandable to see HKMA mopping shares to avert a liquidity crisis or rescue a sharply plunging market. It is also necessary to OFFLOAD those positions carefully when the time is right to place them off. The HKEx Tracker Fund was a good thing which allowed investors to have an indexed like fund in portfolio of a decent size.

Now it looks to be adding to the equity portfolio again. The more you add when markets are good means the less you can do when markets are at depressed levels. Hence the HKEx stake is obviously NOT to boost sentiment, but rather a strategic stake acquisition: the likelihood of future integration and alliance with mainland stock exchanges. That being the case, it is very likely that the HKMA will buy more HKEx shares and /or even privatise the company ahead of the integration. After proper integration, a subsequent all-encompassing listing of a truly China Exchange. The H-shares listings and the QDIIs new rules, plus the new rules to allow individuals to invest directly in HK listed shares are all flagposts to a more cohesive exchange.

This does make HKEx to trade at lofty levels (almost like Stemlife). HKEx now trades at a PER of 54x, NYSE Euronext at 36x and Nasdaq at 30x. About half of their PERs are due to the fact that they are near monopolies in their respective markets. That being the case HKEx, though expensive, may still go higher. All the purchases under HKMA comes under the Exchange Fund, whose primary objective is to defend the value of the HK dollar. Concerns are rising that this new purchase of HKEx shares does not tie in with the Exchange Fund's purposes. Why would HKMA do that unless they were instructed (by Beijing) to act above and beyond the objectives of the Exchange Fund. Some deeper questions need to be asked here.