Stock connect 'will fundamentally change market'

Liu added that China State Construction Engineering Corp, Anhui Conch Cement Co Ltd and China Petroleum & Chemical Corp (Sinopec) "are all large-cap companies that are obviously undervalued".

She said that potential beneficiaries of SOE reform are in the spotlight because their operations and efficiency are set to improve.

Local SOEs such as power generation and equipment producer Shanghai Electric Group Co Ltd "will see faster moves", Liu said, adding that the progress of SOE reform has been "significant" this year.

Six enterprises at the central government level have been designated as test cases for reform and 15 cities and provinces have announced plans for local SOE reform.

Four-party agreement signed for Shanghai-HK stock connect

Through train for equities to lift capital market sentiment

"Some of them propose to split ownership equally among the government, shareholders and employees. It's a quite aggressive approach."

Leung said that retail, information technology and healthcare are the key sectors that will outperform the overall market in the long term. "We have overweighted them for quite long time," she said, adding that the fund will continue to underweigh traditional sectors such as material and energy.

Liu said that the A-share market offers much more choice in sectors such as healthcare and mass-market consumption.

For instance, home appliance makers Hisense Electronic Co and Haier Electronics Group Co are said to have great prospects. Shanghai Jahwa United Co Ltd, a maker of household and cosmetics chemicals, is worth noting as well.

The white liquor sector, led by Kweichou Moutai Co Ltd, as well as advanced equipment manufacturing and the defense industry are also likely to attract overseas buyers.

Financial stocks, on the other hand, are trickier. With issues such as local government financial vehicles and asset quality concerns weighing on Chinese banks, the central government is setting up regional asset management firms to fix the problem.

"The sector, particularly banks and brokers, is being re-rated at the moment. Their valuations have been very attractive. We have slightly overweighted these stocks to capture the potential uptrend," Leung said.

Though the influx of foreign institutions is expected to change the investor structure of the A-share market, 80 percent of daily trading volume is now generated by retail investors.

Liu said their dominance in the equity market will not change overnight.

She noted that institutional investors are very liquidity-sensitive. "They only buy stocks that are easy to sell."

For people eyeing quick money, now is the time to seize arbitrage opportunities between A and H shares, according to a report released by Shenyin Wanguo Securities Co Ltd.

Investors that currently have access to qualified foreign institutional investor and RQFII quotas, which are the official channels for foreign funds to access the Chinese mainland's equity market, can cash in by pair trading on companies dual-listed in Shanghai and Hong Kong, the report said.

If the share price of a particular company is more expensive in Hong Kong than on the mainland, for example, an investor can sell the Hong Kong shares and buy A shares at a discount. The reverse is true as well.

Trades of this kind will help minimize risks as price gaps between A and H shares should narrow after the stock connect program starts.

Tactically, Hong Kong's longer trading hours offer another opportunity. While A share trading in the mainland closes at 3 pm on most days, the market in Hong Kong goes for another hour.

"Taking advantage of signals in the final 10 minutes on the mainland, the Hong Kong market has more time to react to the trend, which A-share investors can then take refer to the next day," Liu said.

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