"If you want to see capitalism in action, go to Hong Kong." ~ Milton Friedman
Hong Kong has come a long way. As a British colony, it was described as a “barren rock” by former British foreign secretary and prime minister Lord Palmerston. Today, the Hong Kong Stock Exchange is reportedly the fifth largest in the world by market capitalization. Here are some direct and indirect routes for investors to gain exposure to the Hong Kong market.
- Investing in exchange-traded funds (ETFs) is a simple way for investors to gain exposure to Hong Kong securities without being exposed to currency risk.
- Investors in the United States can purchase from a limited number of Hong Kong stocks listed as American depository receipts (ADRs) on the New York Stock Exchange, Nasdaq, and over-the-counter exchanges.
- Investors can also trade Hong Kong stocks by opening an account with a brokerage firm that offers an international trading platform.
Trading on the Hong Kong Stock Exchange
Since the British handoff in 1997, Hong Kong and mainland China have operated under the principle of one country, two systems. Hong Kong is called a special administrative region (SAR) and is free to pursue capitalism and manage its own taxes, money, trade, foreign exchange, and currency: the Hong Kong dollar.
In November 2014, the Shanghai-Hong Kong Stock Connect was launched establishing a cross-border channel for access to stock markets and investment. This arrangement allowed investors on mainland China and Hong Kong to trade specified companies listed on each other’s stock exchange through their local securities firm. The following are a few ways that investors can trade directly or indirectly on companies listed in the Hong Kong Stock Exchange.
The easiest way for U.S. investors to gain exposure to Hong Kong's securities is through exchange-traded funds (ETFs). These provide diversification as well as ease of trading without the currency risk. Popular exchange-traded funds in the category include iShares MSCI Hong Kong ETF and First Trust Hong Kong AlphaDEX Fund.
The iShares MSCI Hong Kong ETF (NYSE: EWH) is invested primarily in large- and mid-cap companies in the financial and real estate space. The 24-year-old fund is diversified across 47 holdings and, as of July 2020, manages net assets worth $1.24 billion.
First Trust Hong Kong AlphaDEX Fund (NYSE: FHK) is an eight-year-old fund that seeks to track the Hong Kong stock markets by matching up with an equity index called the NASDAQ AlphaDEX Hong Kong Index. The fund works on an indexing approach and has assets to the tune of $3.1 million under management.
American Depository Receipts
Investors in the United States can select Hong Kong stocks listed as American depository receipts (ADRs) on their home stock exchanges like the New York Stock Exchange (NYSE) or Nasdaq or from over-the-counter (OTC) exchanges. ADRs are a hassle-free way to own foreign stocks as they are traded on U.S. exchanges and can be bought just like common shares through a brokerage account. The drawback here is the limited choice—only a few foreign stocks are registered as ADRs.
Some popular Hong Kong ADRs include AIA Group Ltd. (US OTC: AAGIY), Sun Hung Kai Properties Limited (US OTC: SUHJY), and Hong Kong Television Network Limited (US OTC: HKTVY).
Invest Directly Through a Broker in Your Country
ETFs are an indirect way to hold stocks on the Hong Kong Stock Exchange. ADRs are a direct way to own, but choices are seriously limited. Investors who are keen on participating directly and widely on the Hong Kong stock exchange should open a brokerage account with a brokerage firm in their own country that offers a platform for international trading.
Foreign companies must register with the U.S. Securities and Exchange Commission (SEC) to be offered as ADRs.
Brokerage firms that offer international access generally offer many international exchanges, including Hong Kong’s. Make sure to research brokers thoroughly before trading with them. Check the account type (discretionary or non-discretionary), the commission structure, and regions and countries covered. In the United States, look for SEC registration along with membership in the Securities Investor Protection Corporation (SIPC) and the Financial Industry Regulatory Authority (FINRA).
Invest Directly Through a Hong Kong-Based Broker
Investors from across the globe can invest online through local stockbrokers based in Hong Kong. However, there are restrictions on residents of certain countries and certain hurdles Hong Kong brokers must clear to offer services. In the United States, for example, financial institutions not registered with the SEC cannot solicit U.S. citizens as clients.
In addition, the Foreign Account Tax Compliance Act (FATCA) placed additional restrictions, and, due to this, some Hong Kong brokers avoid U.S. clients. However, residents of other nations may not face the same issues.
The Bottom Line
The Hong Kong Stock Exchange has been soaring with huge Chinese investments flowing into the markets. Investors keen on playing long term must remember that the recent price appreciation and accompanying volatility is not based on fundamentals.
Investors should take care to base decisions on company earnings and economic factors and not just on price fluctuations. On the whole, investors should choose their preferred route to the Hong Kong Stock exchange after understanding the costs, risks, tax considerations, and regulatory compliance involved.