Hong Kong shares inched higher on Monday helped by banking shares even though lack of conviction among investors, a sluggish mainland market and US and UK holidays drove turnover to the lowest this year. In a sign of easing liquidity in China's financial system short-term money markets rates dropped sharply and helped banking shares, which have heavy weightings on benchmark indexes and whose valuations were already attracting investors.
--- Shanghai dips 0.1 percent, small-caps continue to weigh
The benchmark Hang Seng index eked out a 0.3 percent gain, rising a fourth consecutive session and helping it recover all of last week's losses. Turnover at HK$50 billion was the lowest seen this year. China's money market rates fell sharply on Monday, with the weighted average seven-day repo rate sliding 99 basis points to 3.41 percent.
"When short-term rates reverse this quickly we generally see banks start to perform well, helping the market," said a Hong Kong-based equity trader, adding that markets could be set for a turnaround if manufacturing data from China, expected on Wednesday, did not disappoint. Financials were the biggest boost to the broader market led by ICBC, up 0.6 percent and insurer China Life which rose 0.9 percent. CCB and Bank of China inched up 0.3 percent and 0.5 percent respectively.
China's three largest banks are trading at large discounts to their historical valuations on a forward 12-month earnings multiple basis, according to Thomson Reuters Starmine. ICBC trades at a 27 percent discount and Bank of China trades at a 23 percent discount. CCB's discount at 33.5 percent is the deepest among the group and is one factor that makes it one of the most favoured picks among analysts. According to Starmine, 28 of the 32 analysts tracking the stock rate CCB a "buy".
ICBC's 3.9 percent surge on the day in volumes 3.4 times its 30-day average was the biggest intra-day gain in six months, stemming losses on the benchmark Shanghai Composite Index as A-share turnover hit a four-month low, barely breaching RMB 70 billion on the day.
Both major small cap indexes underperformed, with the Shanghai small-cap index down 1.5 percent and the CSI500 index down 1.9 percent. Fengfan Stock Ltd Co , a constituent on both indices which was among the biggest small cap losers on the day, declined 9.0 percent. Market participants expected small-cap companies to be the most vulnerable to a slowdown and have thus been hitting these shares over the past few sessions. Overall, the benchmark Shanghai Composite shrugged off early gains to close down 0.1 percent on Monday, holding up above 2,700, a level traders and analysts viewed as near-term support. The Shanghai Composite's 2011 low at 2,661, recorded in January, is seen as the next key support level.
Market players could have been buying ICBC, China's biggest lender, ahead of its dividend payout announcement next week, said Wang Aochao, an analyst with UOB Kay Hian in Shanghai. The dividend of 0.184 yuan a share gives the stock a dividend yield of 4.4 percent, in line with other large banks.
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