The Trouble of the Bull Market: Public Funds Unable to Invest in Hong Kong Stocks

In this round of spring excitement, investors have two major concerns: first, the Hong Kong stock market is bullish while the A-share market is fluctuating, leading to performance divergence in institutional products; second, domestic macroeconomic fluctuations are decreasing, with the market transitioning from three years of macroeconomic boom to a macroeconomic downturn, but many existing barbell strategies designed to cope with severe macroeconomic fluctuations find it difficult to adjust positions during rapid market upswings.

From the perspective of market divergence, in this round of spring excitement centered on the new economy, the highest quality core assets in the internet, hard technology, smart vehicles, and innovative pharmaceuticals are concentrated in the Hong Kong stock market. This is the essential reason why the Hong Kong stock market is bullish while the A-share market is still fluctuating. About 60% of public asset management products do not have access to the Hong Kong Stock Connect. Even for those that do, the calculated proportion of investable Hong Kong stocks is still about 26.5% below the upper limit specified in the fund contracts on average. The performance divergence and horse racing mechanism are driving the accelerated shift of allocation-type holdings from A-shares to Hong Kong stocks, exacerbating the divergence in market trends between the two regions.

From the perspective of strategy paradigms, the past three years have been a macroeconomic boom, where macroeconomic fluctuations and policy responses have been the main variables driving the market, and barbell strategies have become a way to cope with frequent macro disturbances. In contrast, this year, the policy direction and objectives are clear, domestic macroeconomic fluctuations are decreasing, and the market is transitioning to a macroeconomic downturn. Marginal changes in macroeconomic and policy factors are unlikely to drive market direction and structure, and the industry prosperity-driven approach is taking over from the barbell strategy. In terms of response, edge AI and high-energy-density batteries are relatively exclusive industry themes in A-shares, and we expect a series of catalysts to emerge in the second quarter; the clearing of traditional core assets in A-shares is accelerating, and as the economy recovers, operational turning points are expected to appear gradually. At the same time, we anticipate that some leading companies planning to list in both markets will see their stock prices rise following their listings in Hong Kong.

Hong Kong stocks are bullish, A-shares are fluctuating Allocation-type holdings are accelerating the shift to Hong Kong stocks The clearing of core assets in A-shares is accelerating

1) Hong Kong stocks have entered a bull market for core assets, while A-shares are still in a fluctuating market, showing significant market divergence. As of March 7, after the Spring Festival holiday, the Hang Seng TECH Index led major global stock indices with a cumulative return of 27.8%, and the Hang Seng Index also recorded a strong rebound of nearly 20%. In contrast, while the STAR 50 Index in the A-share market achieved a 16% increase due to its focus on hard technology, the CSI 300 and other weighted indices only saw slight increases. Comparing our summarized "30 New Core Assets in A-shares" and "15 New Core Assets in Hong Kong Stocks," from January 10, 2025, the cumulative gains and losses for core assets in A-shares and Hong Kong stocks in the same period were 9% and 51%, respectively.

2) The core assets of the new economy with large capacity and high consensus are exclusive to the Hong Kong stock market. The four major new economic directions with high market consensus and strong certainty in prosperity—domestic computing power, internet, smart vehicles, and innovative pharmaceuticals—are all concentrated in the Hong Kong stock market. From the perspective of index composition, the Hang Seng TECH Index covers core assets in internet e-commerce, consumer electronics, new energy vehicles, and semiconductors. In terms of newly listed companies, the Hong Kong IPO market in 2023 has also been dominated by new economy sectors such as software (including intelligent driving), innovative pharmaceuticals, and new consumption. More critically, many Hong Kong companies are still in the early stages of recovering their net profit margins and revenue growth. As the economy rebounds, the improvement in profitability for these companies and the market's upward revision of earnings have greater potential than the current valuation recovery 3) Core assets in A-shares still have considerable cyclical attributes, with about 45% of companies yet to emerge from operational inflection points. The 49 core asset companies represented by the "Mao Index + Ning Combination" currently show a relatively balanced market capitalization distribution across technology (25.1%), consumption (27.8%), and advanced manufacturing (19.2%), indicating a stronger overall economic cycle attribute compared to Hong Kong stocks. The prosperity of A-share core assets resonates highly with the macro economy, with revenue growth and ROE exhibiting cyclical fluctuations of about four years, with historical inflection points occurring in 2012Q1, 2015Q3, and 2020Q1. Considering the current signals of PPI bottoming out and social financing warming up, we believe this cycle's inflection point may manifest between the end of 2024 and the beginning of 2025. It is noteworthy that the cyclical positioning model based on marginal changes in ROE indicates that currently, 45% of core assets have not yet emerged from operational inflection points. Furthermore, some companies that have emerged from operational inflection points or are in a sustained prosperity phase have announced plans for listing on the Hong Kong stock market or have issued prospectuses. The prevailing mindset of "Hong Kong stocks being issued at a discount relative to A-shares" has, at this stage, suppressed the performance of these companies in A-shares. However, we believe that after completing their listings in Hong Kong, these companies are likely to experience a resonant upward trend in both A-shares and Hong Kong stocks.

4) Many public fund products' liabilities have intensified institutional investors' performance anxiety and the game-like nature of trading. As of the end of 2024, we have statistics showing that among equity public fund products, those without Hong Kong Stock Connect permissions account for about 3/5 (3,584 funds), but their holding scale accounts for about 3/4 (4.6 trillion yuan). Pure Hong Kong stock funds have a holding rate of 98.5%, while Hong Kong Stock Connect funds only have 25.5%. Funds without permissions are forced to focus on A-shares due to investment scope restrictions. As of March 7, 2025, the median returns of these three types of funds were 15.1%, 7.6%, and 3.7%, respectively, while the top 10% of performing products had returns of 23.9%, 17.4%, and 12.9%. The current differentiation is essentially caused by the underlying asset quality differences arising from investment scope restrictions, reflecting the screening effect of the Hong Kong Stock Connect mechanism on equity fund performance. Funds without Hong Kong Stock Connect permissions, unable to allocate core Hong Kong stock assets, are forced to choose technology stocks in A-shares that are relatively expensive and primarily thematic, significantly enhancing the game-like attributes of trading, which further impacts the sustainability of performance.

Gradually shifting from three years of macroeconomic boom to macroeconomic downturn The strategic paradigm needs to shift from macro-driven logic to industry-driven logic

1) The policy direction is clear, and the thinking is straightforward, but the marginal impact on the market is weakening. Currently, the situation where market expectations fluctuate due to policy uncertainty, and the influence of policy factors has significantly strengthened, is entirely different from the past. Since the major reversal of policy expectations at the end of September 2024, as various policies gradually take effect, we believe that the determination at the policy level is firm, and if the effects are insufficient, further measures will be taken. The marginal impact of macro policies has significantly weakened; for example, short-term variables such as the pace of monetary policy easing and the specific amounts of fiscal stimulus will gradually dissipate their disturbances on the market The market's sensitivity to major policy stimuli has significantly weakened: Wind data shows that the standard deviation of the Shanghai Composite Index's fluctuations five days before and after policy nodes has decreased by 37% compared to 2022-2024, reflecting that the market has entered a low-volatility stable phase. The two sessions in 2025 will be held as scheduled, and in addition to the expected total economic targets, the three clear policy ideas of strengthening technological innovation + supply-side "anti-involution" + demand-side expansion of domestic demand are structural highlights.

2) Macroeconomic fluctuations are gradually decreasing, weakening the influence on long and short directional choices. The most concerning economic aspects for the market—consumption and real estate—both exhibit characteristics of "overall stabilization, structural highlights, and slowing recovery," while the market focus is accelerating towards structurally driven opportunities in the technology industry. This macro environment bears a high similarity to the asset-liability repair period of the U.S. household sector from 2010 to 2015—during the economic growth transition period, the marginal utility of policies decreases, and the market pays more attention to the alpha returns brought by industrial upgrades. China is currently in a similar transformation cycle: on one hand, traditional economic sectors are entering a risk mitigation and gradual stabilization phase, with macroeconomic fluctuations significantly decreasing; on the other hand, new productive forces are reshaping the economic growth paradigm, leading to a structural differentiation that causes the capital market to exhibit characteristics of "macro dullness + industrial differentiation." Therefore, macro concerns should be downplayed, with more focus on industrial trends to avoid excessive chasing of policy adjustments or macro fluctuations that could amplify timing errors in trading.

3) Increased external disturbances, but market expectations are sufficient. Recently, external disturbances have been frequent (such as the signing of the "America First Investment Policy" memorandum on February 21 and the re-imposition of a 10% tariff on China starting March 4), but the market's tolerance is gradually increasing with the recovery of risk appetite. The overseas policy research team of CITIC Securities believes that Trump is currently more focused on domestic political agendas and "non-China" diplomatic layouts, and the U.S.-China rivalry is not a short-term priority for him, which provides a buffer period for restoring confidence in the Chinese market. It is worth noting that uncertainty regarding U.S. policies towards China may significantly increase in April. Potential risk points include the investigation results of the "America First Trade Policy" memorandum and possible restrictions on China's chip industry chain. We believe that even if larger-scale trade frictions occur, they will simultaneously impact the economies of both China and the U.S., but China has more policy leeway and stronger economic resilience, while the unexpected inflation and recession risks triggered by disputes will have a greater negative impact on the U.S. economy and capital markets. From this perspective, as long as the catch-up in the technology sector continues, even with increased external risks, investing in Chinese assets remains a better choice for risk aversion.

Strengthen industrial logic and seek opportunities for rebound

Under the characteristics of clear policy expectations, normalized macro fluctuations, and dominant industrial momentum, we suggest focusing on the "New Core Assets 30" in the A-share market along the three perspectives of promoting industrial value reconstruction through technological innovation, guiding industry supply and demand clearing through supply-side reform, and releasing consumption potential through institutional optimization. The trend of anti-involution on the supply side is clear, and it is expected that some cyclical industries such as aluminum, steel, and panels will benefit from the implementation of quality improvement and efficiency enhancement industrial policies proposed during the two sessions, while closely monitoring supply and demand changes and market conditions in the new energy sector In the four directions of domestic computing power, edge AI, high-density energy batteries, and innovative drugs, edge AI and high-density energy batteries are sectors in the A-share market with relatively monopolistic characteristics. In the future, with the launch of new products by leading manufacturers, there will be intensive thematic catalysts and an upward trend in industrial prosperity, and market attention is expected to significantly increase.

Risk Factors

Increased friction in technology, trade, and finance between China and the United States; the effectiveness of our country's policies or economic recovery may fall short of expectations; macro liquidity both domestically and internationally may tighten more than expected; A-share asset clearing may not meet expectations; the recovery of operational indicators for Hong Kong-listed companies may not meet expectations.

Author of this article: Qiu Xiang et al., Source: CITIC Securities Research, Original title: "Strategy Focus | The Worries of a Bull Market."

Risk Warning and Disclaimer

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