Additional Note

We believe that the success of the Shanghai-Hong Kong Stock Connect program in the past two weeks is a significant event which will lead to a steady appreciation and revaluation of Hong Kong stock market, and possibly of the Hong Kong dollar, in the next few years.

The Chinese Government wants to make it easier for funds to flow in and out of China with the gradual strategy of making the Chinese Yuan an official “reserve currency” by the end of 2015, joining the US Dollar, the Euro and the Yen. In the meantime, the People’s Bank of China has instituted a policy, to expand the daily range of the Chinese currency from 1% to 2%, putting pressure on the exchange rate, and increasing potential volatility and flexibility.

Hong Kong is likely to be the principal beneficiary of this political and financial goal for China. In the past two weeks, we have seen the daily inflow from China into Hong Kong shares reach US$1.6 billion daily (and over US$2 billion into Shanghai.) As the premium of A shares over H shares listed in Hong Kong has been over 30%, we expect that the arbitrage activity will rapidly narrow this premium, and Hong Kong listed shares will be the main beneficiary. In addition, a further trading link between the Shenzhen and Hong Kong Exchanges will be launched imminently. The authorities have already indicated that they would make it easier for mainland investors to open trading accounts under 500,000 Chinese Yuan (US$80,700) in size.

The upward pressure on the Hong Kong dollar is already causing the Hong Kong Monetary Authority to intervene heavily, and the fixed peg, which has held steady since October 1983, may become subject to increased pressure.

In the Bamboo Fund, we have already assembled a portfolio of blue-chip Hong Kong and China shares with average dividends of c.3%. We expect that this pressure on the market and the currency, will benefit undervalued Hong Kong blue-chips. In addition, there are hundreds of Chinese companies, in the consumer, internet, healthcare and tourism sectors, which are listed on the Hong Kong Stock Exchange, and we are conducting company visits every day to try to identify the most promising small cap and mid cap names.

Although the Chinese economy in the first quarter of 2015 has shown a slowdown to GDP growth levels under 7%, the service and consumer sectors continue to grow at a steady pace, and are much more attractive area to invest in than government SOEs, infrastructure or property. For the next 10 years, we continue to see growth in the Chinese middle class, and as they improve their living standards, their demand for many products will expand, including travel and tourism, insurance and banking, and healthcare and consumer products.

The focus of our China team, based in Hong Kong is very much to identify the next generation of corporate winners who will be able to benefit from these trends.

Robert Lloyd George
April 2015