Hong Kong Stocks Soar: The Surge of Brokerage Shares

Recently, fueled by favorable policies, Hong Kong stocks have experienced an impressive rally. Among the leaders of this market frenzy are brokerage shares, which have emerged as the "flag bearers" of the bull market. As of October 2, shares like Shenwan Hongyuan Hong Kong (00218.HK) have seen astonishing gains, with a daily increase of up to 200% and a ten-day surge of nearly 700%. Other firms, including China Merchants Securities (06099.HK) and Orient Securities (03958.HK), have also posted remarkable increases of 170% and 133%, respectively. However, today’s market correction has led to a pullback in brokerage stocks.

The Dynamics of the Brokerage Market

Benefiting from Market Activity

Analysts point out that with the rapid warming of the capital market, both A-share and Hong Kong markets have witnessed explosive trading volumes, making brokerages one of the biggest beneficiaries. Previously, public mutual funds had significantly low exposure to the brokerage sector, and the valuations of these stocks were relatively low. As liquidity improves and supportive policies roll out, there is considerable upward potential for brokerage valuations.

Comparing A-shares and H-shares

When compared to A-share brokerage stocks, Chinese brokerages listed in Hong Kong offer more attractive price-performance ratios. Data indicates that for brokerages listed in both A and H shares, H-shares are trading at discounts of over 4% compared to A-shares, with some discounts exceeding 50%. This significant price disparity provides a solid foundation for the rebound of H-share brokerages.

Valuation Insights from Leading Analysts

Historical Context of Valuations

China International Capital Corporation (CICC) emphasizes that brokerage stock valuations and holdings remain at relative historical lows. Currently, A-share brokerages are trading at 1.39x Price-to-Book (PB) ratios, positioning them in the 27.8% percentile over the past decade. In contrast, H-share brokerages are trading at a mere 0.54x PB, placing them at the 7.2% percentile for the same period.

Positive Catalysts for Growth

UBS also believes that brokerage stocks, as market beta assets, will benefit from macroeconomic and capital market support measures. Their research indicates that H-share brokerages are currently trading at a Price-to-Book ratio of only 0.4, marking a historic low. The sector is witnessing multiple positive catalysts, including coordinated policy support, unprecedented cross-tier capital market initiatives, and accelerated industry mergers to improve the operating environment.

The Role of Policy in Supporting Brokerages

Recent Monetary Policy Initiatives

In recent weeks, the central bank has unveiled a series of favorable policies aimed at enhancing market liquidity and supporting stock market development. The Politburo meeting emphasized the need to invigorate the capital market, encouraging long-term funds to enter the market and addressing funding blockages from social security, insurance, and wealth management sectors. They also focused on supporting mergers and acquisitions for listed companies and advancing public fund reforms, highlighting the importance of small and medium investors.

Impacts on Brokerage Valuation and Performance

Guotai Junan Securities notes that the central bank's interest rate cuts, reserve requirement ratio reductions, and new liquidity tools will positively influence brokerage valuations and performance. Currently, the brokerage sector’s valuations and fund holdings are at historical lows, and there is potential for annual performance growth amid improved liquidity. This resurgence in liquidity is expected to boost market trading activity, revitalizing the stock market and significantly benefiting brokerage services such as brokerage commissions, margin financing, and equity investments.

Investment Opportunities Amid Market Changes

Identifying Rebound Opportunities

CICC reiterates that the brokerage sector’s performance, valuations, and holdings are at a low point. The recent interest rate cuts and liquidity enhancements are providing necessary support for the stock market's development. New policy tools, such as facilitating swaps between securities, funds, and insurance companies, along with stock repurchase loans, are being implemented to bolster the market. Investors are advised to watch for sentiments surrounding mergers and acquisitions, market improvements, and internal and external policy catalysts that could lead to rebound opportunities.

Conclusion

The recent surge in Hong Kong stocks, particularly in the brokerage sector, highlights the strong response of the market to favorable policies and improved liquidity. As brokerage stocks experience significant gains, they present compelling opportunities for investors looking to capitalize on the recovery. With valuations at historical lows and multiple catalysts for growth, now is an optimal time for investors to consider increasing their exposure to this dynamic sector.