Since the beginning of this year, A shares have outperformed Hong Kong stocks significantly, and the Hang Seng AH share premium index has been rising. During this period, the Hang Seng AH share premium index rose for seven months and hit a new high of more than 18 months at 135.88 points on Aug. 14. As of Oct. 15, the Hang Seng AH-share premium index was at 131.72, up 11.19% from the start of the year.

The Hang Seng AH share premium index is at 131.72, meaning that A shares as a whole are 31.72 per cent more expensive than H shares. In theory, the AH shares tracked by the Hang Seng AH share premium index are issued separately according to the principle of the same share, the same time and the same price. In fact, there is a clear price difference between ah shares. It is generally believed in academic circles that this is mainly caused by the different investor structure of the two markets.

In fact, no matter from the issuance of Hang Seng AH shares premium index in 2007, or from the opening of Shanghai-Hong Kong Stock Connect in November 2014, or from the opening of Shenzhen-Hong Kong Stock Connect in December 2016, the AH premium index does not have a significant upward and downward trend. This means that H shares do not show a return to the valuation of A shares in the long run.

However, the current Hang Seng AH share premium index has been at an excessively high premium level, which actually means that Hong Kong stocks have a higher income-risk ratio, although it is difficult to show that Hong Kong stocks are ushering in a rising trend, but at least it means that from the perspective of relative returns, it is more cost-effective to allocate Hong Kong stocks than A-shares. From the perspective of historical data, it is still profitable through AH, that is, low-discount companies have Alpha, while high-discount companies pay more attention to Beta.

The AH share premium index continues to rise.

The Hang Seng AH share premium index tracks the price difference between stocks listed in both the mainland and Hong Kong (A shares in the mainland and H shares in Hong Kong).

According to Zhitong Financial APP, the Hang Seng AH share Premium Index calculates the weighted average premium (or discount) of A shares to H shares based on the current market value of A shares and H shares included in the index. The higher the index, the more expensive A shares are relative to H shares (the higher the premium). On the contrary, the lower the index, the cheaper A shares are relative to H shares.

The data show that the Hang Seng AH share premium index has continued to climb this year, rising for seven months and hitting a new high of more than 18 months at 135.88 points on Aug. 14. As of Oct. 15, the Hang Seng AH share premium index remained relatively high at 131.72, up 11.19% from the start of the year.

Behind the widening of the Hang Seng AH share premium index, A shares outperform Hong Kong stocks as a whole. According to APP statistics of Zhitong Finance and Economics, since the beginning of the year, Hong Kong stocks, the Hang Seng Index has risen 2.55%, and the State-owned Enterprises Index has risen 3.71%. As for A-shares, the Shanghai Stock Exchange has pointed out a cumulative increase of 19.93%, Shenzhen Zhengcheng pointed out a cumulative increase of 33.59%, and the gem Index has risen 32.82%. Obviously, because the Shanghai and Shenzhen stock indexes have outperformed the Hang Seng Index, and the A shares of "A shares" generally outperformed H shares, the Hang Seng AH shares premium index has gradually risen, so that A shares as a whole are 31.72% more expensive than H shares.

It should be noted that according to the compilation rules of the Hang Seng AH share premium index, it is weighted by the current market value of the constituent stocks. Therefore, there will be distortion when using the premium index of Hang Seng AH shares to compare the prices of A shares and H shares. For example, if A-shares are more expensive than Hong Kong shares, but only a few large-cap stocks have a small premium, then the Hang Seng AH-share premium index will not reflect a huge A-share premium. Therefore, some market analysts have pointed out that the actual ah share price gap is even larger than the index shows. Relative to A shares, some H shares may be "cheaper" than they look.

In fact, among the 114 listed "A shares" stocks tracked by the Hang Seng AH share Premium Index, there is no upside down phenomenon. 91 stocks have a premium rate that exceeds the Hang Seng AH share Premium Index, accounting for about 80%; 37 stocks have a premium rate of more than 100%, accounting for about 32%; 16 stocks have a premium rate of more than 200%, accounting for about 14%; and 7 stocks have a premium rate of more than 300%, accounting for about 6%.

Luoyang Glass has the highest premium rate of 601.03%, far ahead of other stocks. Zhejiang Shibao and CITIC Construction ranked second and third in premium rates, with 513.58% and 353.07% respectively.

The AH spread is difficult to eliminate.

In theory, the AH shares tracked by the Hang Seng AH share premium index are issued separately according to the principle of the same share, the same time and the same price. In fact, there is a clear price difference between ah shares. It is generally believed in academic circles that this is mainly caused by the different investor structure of the two markets.

"H shares" are issued on the Hong Kong Stock Exchange, and in the entire Hong Kong stock market trading, according to Hong Kong Exchanges and Clearing data, as of the end of 2018, institutional investors were still the main participants in the Hong Kong stock market, accounting for 54.84%. Individual investors are still a minority in Hong Kong stocks, accounting for only 16%. "A shares" are issued on mainland stock exchanges, while trading in the A share market is dominated by investors. By the end of 2018, there were a total of 145.8273 million A-share investors, including 145.4966 million individual accounts, accounting for more than 99.77 per cent, according to China Securities data.

"individual investors are far less sensitive to risk than institutional investors, so less compensation is needed to achieve the same return. This has gradually pushed up the price of A shares. " Industry insiders said.

In addition, the spread of AH shares will attract investors to carry out arbitrage, and in theory, the spread of AH shares will be eliminated by arbitrage. In fact, since the launch of the Hang Seng AH share premium index, the index has been above 100 for a long time.

There has been an explanation for this in behavioral finance, which is called "limited arbitrage". Limited arbitrage means that "arbitrage eliminates price spreads" is based on a hypothetical world in which capital flows freely and there is no friction.

In reality, the capital of A shares and Hong Kong stocks can not flow completely freely. For example, foreign exchange controls require the conversion of RMB into Hong Kong dollars before H shares can be traded. Therefore, investors only rely on the AH premium and invest with a simple and rough discount premium strategy, which is easy to be distorted.

In fact, H shares do not tend to move closer to A shares.

Econometrics points out that if a time series data does not have a "unit root", it can show that the data is "stable", meaning that there is no significant upward or downward trend in the data.

Through the ADF test in econometrics of AH premium index, we can find that AH premium index is a "stable" time series, no matter from the issuance of Hang Seng AH shares in 2007, or from the opening of Shanghai-Hong Kong Stock Connect in November 2014, or from December 2016, there is no significant upward and downward trend. This means that H shares do not show a return to the valuation of A shares in the long run.

Ah shares are still profitable: low discount stocks look at Alpha, high discount stocks look at Beta

However, the emergence of the Shanghai and Shenzhen-Hong Kong stock links has also enhanced the liquidity of funds between the two places. Judging from historical data, ah shares are still profitable, that is, low-discount companies have Alpha, while high-discount companies look more at Beta.

The data show that the Hang Seng AH share premium index has continued to climb so far this year, falling after hitting an 18-month high of 135.88 on Aug. 14. As of Oct. 15, the Hang Seng AH share premium index was at an all-time high of 131.72.

According to Zhitong Financial APP, too high premium level actually means that Hong Kong stocks have a higher income-risk ratio. Although it is difficult to show that Hong Kong stocks are ushering in a trend of rising opportunities, at least it means that from the perspective of relative returns, it is more cost-effective to allocate Hong Kong stocks than A-shares. According to the analysis, in view of this, from the perspective of allocation, investors can consider a moderate tilt to Hong Kong stocks in the allocation of Chinese equity assets.

This means that there are likely to be two situations in the future, that is, either A shares fall more than Hong Kong stocks, or Hong Kong stocks rise more than A shares. No matter which situation occurs, it means that from the point of view of allocation, it seems that the allocation value of Hong Kong stocks is greater.

However, it is easy to be distorted to invest with a simple and rough discount and premium strategy. GF Securities Co., LTD. takes low-discount and high-discount companies as samples: since 2006, 10 H-share companies with the lowest AH premium center have been taken as low-discount companies; 10 companies with a market capitalization of more than HK $5 billion and the highest AH premium rate at the end of the year have been selected to build a high-discount H-share plate, and the composition is weighted according to market value, and the composition is changed once a year.

Through the evolution of the data, according to GF Securities Co., LTD., low discount H shares outperform the market instead, reflecting a certain Alpha attribute. In fact, with the exception of 2015, H-share companies with low discount rates have made excess returns. The popularity of such companies may be related to their better corporate texture (such as Ping An Insurance, Anhui Conch Cement, etc.)-although such companies have limited valuation advantages over A-shares, they have fewer fundamental flaws and are recognized by southward capital and foreign investors. it's easier to get excess returns.

At the same time, the high discount H shares did not outperform the market, only in the period of AH premium fall, the periodic outperformance of Hang Seng Index is more reflected in the Beta attribute. Different from the understanding that "cheapness is the last word", the portfolio with the highest AH premium since 2015 cannot outperform, especially considering that many of the targets with the highest AH premium have small market capitalization and liquidity deviation; in terms of industry distribution, the companies with the highest AH premium are mostly concentrated in manufacturing, cycle, securities and other fields, and do not belong to the foreign preference sector. However, in the "H is better than A" stage, the AH premium rate fell, high discount H shares can still achieve excess returns, with a certain Beta attribute.

In addition, highly discounted H-share financial stocks are an exception, including both Alpha and Beta. Compared with other high discount targets, the discount rate of Hong Kong financial stocks relative to A shares shows stronger characteristics of "mean regression". At the same time, foreign capital is not excluded and it is easier to obtain excess returns, and southward funds are more preferred and heavily positioned, represented by banks and insurance.