The upcoming Shenzhen-Hong Kong Stock Connect program - the second of its kind between the SAR and the mainland - will provide foreign investors with freer access to the mainland's high-growth sectors, as well as fairer exposure to the country, UBS bankers say.

The Swiss-based bank said on Friday overseas investors are looking forward to the new cross-trading link, expected to be launched later this year, with interest and anxiety.

"The market access program with Shenzhen will be another milestone in the evolution of the opening up of the mainland market. Shenzhen's stock exchange has a widely different composition compared with Shanghai's. While the latter is known for more matured business and blue chips, Shenzhen leans to newer economies, non-cyclical industries and SMEs (small- and medium-sized enterprises)," said Damien Horth, head of Asia Pacific equity research at UBS AG.

"The growth drivers of the mainland - the consumer sector, technology firms, industrials and infrastructures - are all listed here. We expect stronger earnings growth out of Shenzhen. It will be a unique exposure for global investors," Horth said.

The combined valuation of the IT, value-added manufacturing and consumer sectors amounts to nearly 60 percent of the market cap in Shenzhen, Hou Yankun, head of China equity and Asian auto research at UBS, said earlier this week.

Hong Kong Exchanges and Clearing Ltd Chairman Chow Chung-kong said on Thursday the Shenzhen-Hong Kong cross-trading program would be launched in the second half this year, and details of the arrangement would be disclosed in the first half.

"The mainland authorities would also announce improvements to the stock connect between Hong Kong and Shanghai, such as raising the quotas and adding more stocks that can be traded under the program," Chow said.

Referring to the schedule, UBS forecast that A shares will be left out in the annual review of Morgan Stanley Capital International (MSCI), a major index provider, in June this year.

"We believe the MSCI will wait for the Shenzhen market to be added to the stock connect scheme," said David Rabinowitz, head of Asia direct execution services at the bank.

With the launch of the Shenzhen-Hong Kong stocks link, Rabinowitz forecast that "a fairer representation of the mainland will be offered to foreign investors. That's exactly what the MSCI is looking for".

He said that for overseas investors who already have mainland exposure, they would generally play the market through offshore ETFs (exchange-traded funds). But the sector composition of these ETFs is often very different from that of Shenzhen.

"Currently, turnover under the Shanghai Hong Kong stock connect is mainly driven by individuals, private bank clients and hedge funds. Long-only funds are still building their research capability on A shares," said Tim Wannenmacher, co-head of global financing services Asia Pacific at UBS.

emmadai@chinadailyhk.com

The upcoming Shenzhen-Hong Kong Stock Connect program would provide another converging platform for capital from the mainland and the rest of the world. Brent Lewin / Bloomberg

(HK Edition 05/01/2015 page6)