Seizing the pricing power of Hong Kong stocks! Southbound funds have purchased nearly HKD 250 billion this year, and the market value of funds heavily invested in Hong Kong stocks has reached a record high

On February 26, after a brief one-day pause, Hong Kong stocks resumed their upward trend, with the Hang Seng TECH Index breaking through 6,000 points during the session, reaching a new high since 2022. As Hong Kong stocks surged, mainland capital also accelerated its southward movement, including significant purchases of Hong Kong stocks by funds.

Data shows that both the market value of Hong Kong stock targets heavily held by public funds and the proportion of Hong Kong stocks among the top holdings of public funds have reached historical records.

1 Trading Volume Accounts for Nearly "Half the Territory"

In this round of recovery for Hong Kong stocks, the participation of southbound assets has continued to increase, and their influence on Hong Kong stocks is growing day by day.

On February 25, affected by factors such as the "America First Investment Policy," Hong Kong stocks opened lower but ultimately rose after the initial dip. On that day, southbound funds net purchased Hong Kong stocks worth HKD 22.033 billion, the second-highest amount this year. Additionally, the trading volume of southbound funds accounted for 48.68% of the total trading volume of the Hang Seng Index, approaching half the territory.

On February 26, southbound funds continued to flow in significantly, driving Hong Kong stocks to regain their upward momentum after a brief one-day pause. On that day, the Hang Seng TECH Index surged by 4.47%, with a net inflow of HKD 104 billion from southbound funds, accounting for 46.88% of the trading volume. Among leading stocks such as Xiaomi Group and Tencent Holdings, the trading volume proportion has already exceeded 50%.

Earlier, on February 17, the trading volume of southbound funds reached HKD 200.671 billion, accounting for 50.13% of the total trading volume of the Hang Seng Index that day, breaking the 50% mark.

Jin Meiqiao, a fund manager at Qianjin Private Equity, stated in a letter to investors that the pricing power of southbound funds in Hong Kong stocks and their voice in the Hong Kong stock market are continuously rising. The sustained inflow of southbound funds indicates that mainland investors are interested in Hong Kong stocks. "If the annual southbound capital of HKD 800 billion continues for 2-3 years, the pricing power of Hong Kong stocks will inevitably be in the hands of mainland funds. By the fourth quarter of 2024, the proportion of mainland investors in Hong Kong trading volume will increase to a record 45%. If this trend continues, it is very likely to exceed 50% in 2025," Jin Meiqiao stated.

As of now, the target of a trading volume proportion exceeding 50% has been achieved. Additionally, as of February 26, southbound funds have net inflowed HKD 249.6 billion into Hong Kong stocks year-to-date, a significant increase compared to the same period last year.

Chen Guo, Chief Strategist at CITIC Securities, pointed out in the latest research report that southbound funds will continue to be an important driving force for the rise of Hong Kong stocks. He believes that the difference in funding costs between domestic and foreign capital provides a basis for the inflow of southbound funds. Mainland interest rates remain relatively low, while the U.S. maintains high interest rates, resulting in a high yield spread between Hong Kong stocks and bonds anchored to Chinese bonds, while the yield spread for Hong Kong stocks and bonds anchored to U.S. bonds is relatively low. Therefore, the willingness of domestic capital to flow into Hong Kong stocks is evidently stronger than that of foreign capital. Considering that the U.S. is likely to slow down its interest rate cuts this year, it is expected that this phenomenon will continue for a long time

2 Funds Help Domestic Capital Regain Pricing Power

As important institutional investors, funds are a significant component of southbound capital and a key force driving the recent rebound of Hong Kong stocks. According to data from Dongfang Caifu Choice, as of the end of the fourth quarter of 2024, the market value of Hong Kong stocks heavily held by public funds reached 469.2 billion yuan, setting a historical record, with a quarter-on-quarter increase of 1.03% and a year-on-year increase of 38.12%, both surpassing the growth rates of the Hang Seng Index and the Hang Seng TECH Index during the same period.

The weight of Hong Kong stocks in the holdings of public funds also reached a historical high. As of the end of the fourth quarter of 2024, the total stock assets heavily held by public funds amounted to 3.22 trillion yuan, with Hong Kong stocks accounting for 14.57%, a new historical high. From 2020 to 2023, this weight was 8.27%, 7.82%, 11.63%, and 11.50%, respectively.

Some public funds have even raised their positions in Hong Kong stocks to historical extremes. For example, the Hong Kong stock position of the 富国民裕沪港深精选基金 (Fidelity Minyu Hong Kong-Shanghai-Shenzhen Select Fund) increased from 87.66% at the end of the third quarter last year to 92.4% at the end of the fourth quarter, the highest ratio ever; the Hong Kong stock position of the 嘉实港股互联网产业核心资产基金 (Harvest Hong Kong Internet Industry Core Assets Fund) rose from 93.03% at the end of the third quarter last year to 93.58% at the end of the fourth quarter, again breaking the historical high.

Chen Cong, the manager of 兴全沪港深两年持有基金 (Xingquan Hong Kong-Shanghai-Shenzhen Two-Year Holding Fund), stated that the current market situation is significantly different from the "southbound acquisition of pricing power" in 2020.

On one hand, the proportion of mainland investors in the overall Hong Kong stock holdings is sufficiently high, to the extent that it has gradually become a stock market for domestic capital. In recent years, many institutional investors have been more actively participating in Hong Kong stock investments, whether through pure Hong Kong stock funds or funds investing in Hong Kong stocks via the Hong Kong Stock Connect. The increase in the proportion of domestic capital investing in Hong Kong stocks will, to some extent, change the market attributes of Hong Kong stocks, which may slowly transition from a purely offshore market to a semi-offshore market. Future fluctuations and risks, especially downward risks, may be better than in the past.

On the other hand, the pricing aesthetics of the Hong Kong stock market are increasingly resembling those of the A-share market. For example, some purely growth-oriented stocks would not have the current stock prices in a purely foreign capital system, but due to the emphasis on high growth by domestic capital, these companies are expected to maintain relatively high valuations for a considerable period. This also proves that at least for a considerable time, part of the pricing power in the Hong Kong stock market is in the hands of domestic capital.

3 Synergy Between Domestic and Foreign Capital

In addition to the significant influx of domestic capital represented by funds, recently, several foreign institutions have been bullish on Hong Kong stocks, and the global capital "replenishment" may inject new vitality into Hong Kong stocks, forming a resonance between domestic and foreign capital.

Huazhang Fund pointed out that recently, passive foreign capital has accelerated its inflow into Hong Kong stocks, while active foreign capital continues to flow out but at a reduced scale. As of February 19, the Hong Kong stock market has seen accelerated inflow of passive funds (ETFs), with the scale of passive foreign inflow rising from 540 million USD the previous week to 910 million USD, mainly focusing on funds investing in China and Chinese concept stocks, aligning with investors' characteristics of using these two index tools to speculate on the technology market; the outflow of active funds (mainly long-only) has narrowed, with outflows primarily from funds focusing on China and emerging markets, while inflows are mainly from Chinese concept funds Goldman Sachs' latest report also shows that from February 14 to 20, hedge funds increased their willingness to bet on Asian stock markets, reaching the highest level since 2016, with A-shares and Hong Kong stocks accounting for nearly half of the capital inflow.

"Underweight is an opportunity, and rebalancing is a trend." Franklin Templeton believes that the global "top-up" of funds will inject new vitality into Hong Kong stocks, especially the Hong Kong internet sector, ultimately supporting a healthy rise in the current Hong Kong internet market both qualitatively and quantitatively. Currently, the pricing power of southbound funds has reached over 40%, and the resonance of domestic and foreign capital sentiment may still have momentum.

However, Chen Guo pointed out in the research report that the role of foreign capital in Hong Kong stocks is mainly impulsive. From the market trends in May and September last year, it is evident that foreign capital quickly flowed in for certain reasons in the short term, but once the logic reversed, hedge funds would continue to sell. Moreover, after Trump's administration, the uncertainty of international relations faced by foreign capital has increased, so if a macro-level black swan event occurs in the future, the attitude of foreign capital will also change, making it unwise to rely on it as the fundamental support for the capital market of Hong Kong stocks.

Author of this article: Pei Lirui, Source: Securities Times, Original Title: "Southbound Funds Continue to Increase, Fund Holdings in Hong Kong Stocks Reach Record High"

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