SGX China A50 Index Futures In Focus

The weekend saw the release of China’s August value-added industrial output numbers at 6.9% year-on-year, which was down from July’s level of 9.0%. In reaction today, the FTSE China A50 Index is currently off 0.5% from last Friday’s close, trading below 7,300. The China A-share stock market has recently seen a new wave of interest associated with the soon to arrive Hong Kong-Shanghai Stock Connect launch.

Under this programme, qualified institutions and individuals in mainland China and Hong Kong will be able to trade shares listed on the Hong Kong Stock Exchange (HKEX) and the Shanghai Stock Exchange (SSE) respectively, subject to quotas.

In an interview with Channel NewsAsia, CLSA's global head of trading, Andy Maynard, said: "Despite all the problems with settlement, tax stance, and despite the cost, it is very likely that the through-train will be incredibly successful from the word 'go'. And the quota to be used up incredibly quickly in the first couple of days."

However, it seems that China shares are likely to enjoy the limelight rather than their Hong Kong counterparts. Some 77% of mainland investors surveyed by CLSA stated their disinterest in investing in the island territory. The renewed focus on Chinese equities is reflected in the futures market – the SGX China A50 Index Futures, a proxy for the Chinese A-shares, saw a healthy spike in interest in August, with open interest hitting a high of 532,003 on 25 August 2014.

Volume for the equity futures chalked up a new record in the same month – with 3,714,367 contracts exchanging hands – the highest monthly numbers till date. Currently, SGX China A50 Index Futures contract is the only offshore futures contract based on the China A-share market, that allows international participants to hedge or complement their overnight positions in the Chinese markets.

With extended trading hours of 16.5 hours of trading as compared with onshore markets, coupled with its high liquidity and high correlation with the cash index, the contract functions as an efficient offshore price discovery centre for the Chinese A-shares.

Premium Companies Dominate  FTSE China A50 Index

Anchored by several key financial institutions - the FTSE China A50 Index has a clear financial slant - over 60% weightage in financial companies. At the same time, the FTSE China A50 Index also shares several prominent firms with other key indices.

A total of 39 and 18 FTSE China A50 Index member companies are found in SSE180 and Hang Seng China Enterprise (HSCEI) indices respectively. On an earnings perspective, companies in the FTSE China A50 Index mustered a profit margin of 13.44 versus HSCEI’s 10.75 and SSE180’s 10.58. Operating margins was also higher for the A50 index (16.68) as compared with 14.16 for the HSCEI and 10.58 for SSE180 index.

On another measure of shareholders’ returns, Return on Equity (ROE) was 18.25 for the FTSE China A50 Index and versus HSCEI’s 16.28 and SSE180’s 15.98. Valuations, however, was a little lower with companies in the FTSE China Index trading at price/earnings (P/E) ratio of 7.13 compared to a slightly higher 7.93 ratio for the HSCEI and 9.5 for SSE 180.

P/E measures the price of a stock relative to its most recent earnings.

Source: Bloomberg (As at 09 September 2014)

Source: Bloomberg (YTD 2014)

Narrowing Spreads

Given the robust earnings of the FTSE A50 China index’s member companies, lower valuations, coupled with the anticipated rollout of Stock Connect, investors have been gravitating towards the A-Shares.  The Hang Seng China AH Premium Index, which tracks the average price difference of A shares over H shares for the largest and most liquid Chinese companies with both A-share and H-share listings, is recording a narrowing spread. The index closed at 93.14 on 08 September 2014.

A value of over 100 would indicate a price premium of A-shares to H shares and a value of below 100 means H-shares are trading at a premium versus A-shares. A value of 100 means that A-shares are trading on par with H-shares.

If Hang Seng China AH Premium Index is, say, 93.14, then A-shares are trading at a discount to H-shares. On a 3-months basis, (09 September 2014), the index is up 2.24% - the A-shares premium is gaining.

One way of gaining access to the A-shares market is via purchase of an ETF or a China A50 Futures Contract. Compared with an ETF, a China A50 Futures Contract offers numerous advantages and flexibility – ranging from extended trading hours, leverage, and the absence of management fees.

SGX FTSE China A50 Index Futures – Contract Specifications

The SGX China A50 Index Futures tracks the performance of the largest 50 ‘A’ shares companies in China through the underlying FTSE China A50 Index. As the only offshore futures tracking the China A-share market, it has extended trading hours of 16.5 hours of trading as compared to 4.5 hours of trading on onshore futures market. It opens 15 minutes before onshore futures market, and closes at 2am Singapore time the following day, allowing global investors to manage their positions during European and partial U.S. hours.

Please note that Futures contracts have been categorised as Specified Investment Products (SIPs) as part of an MAS initiative to introduce stronger measures and enhance requirements to further safeguard the interests of individual investors. SGX has introduced two online initiatives, a Customer Account Review Module and an Online Education program, to improve the understanding and trading of SIPs listed on SGX. Please click here to access these initiatives.