Alibaba's connect membership may be a boon for overseas stocks
Alibaba Group's impending inclusion in the Stock Connect may unleash as much as US$3.2 billion of cash across global markets. Analysts say that Japan and US equities are potential beneficiaries.
The addition will allow qualified domestic institutional investor (QDII) funds to own shares of Alibaba via the connect, instead of accessing them via their foreign exchange quota. Asset managers can then use the quota that's freed up to buy other shares including overseas names.
The inclusion is likely to provide a further fillip for foreign equities such as US and Japanese stocks which have handily outperformed Chinese stocks this year. The benchmark CSI 300 Index has lost over 3% since end-Dec, compared with a gain of more than 10% for both the S&P 500 and Topix gauges.
"US stocks are simply offering better returns so there's going to be unstoppable demand, that's the hard truth," said Yu Aibin, fund manager at Shenzhen Jointfull Capital Management. "For larger investors, positioning via QDII funds, even with some premiums, is still a good deal, as the cost of capital is lower than through other channels such as cross-border swaps."
QDII allows institutional investors who meet certain conditions to invest in foreign securities within prescribed quotas. Analysts say Alibaba may gain connect membership as soon as Sep 9. Its primary listing, which takes effect on Wed (Aug 28), is likely to make it eligible for southbound trading in early Sep following the next review.
Bloomberg Intelligence estimated that the freed-up QDII quota would total US$3.2 billion, larger than the US$2.3 billion added in Jun when China lifted a cap on foreign securities investment. The total approved quota for asset managers was bumped up by US$1.6 billion back then.
To be clear, the positive effects will not be immediately evident.
Bloomberg Intelligence (BI) reckons it will take 3 years for the quota to be fully available as money managers tend to gradually phase out their holdings via redemptions and subscriptions. BI noted it has taken 2 years for the Shanghai listed Huatai-PineBridge CSOP Hang Seng Tech Index ETF to convert 71% of its underlying Hong Kong-listed product from QDII to the Stock Connect.
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