The AH premium continues to narrow, with net inflows from southbound funds exceeding the total for the entire year of 2024

On July 25, southbound funds had a total net purchase of HKD 20.184 billion, with net purchases of HKD 11.474 billion in the Shanghai Stock Connect and HKD 8.71 billion in the Shenzhen Stock Connect. Since the beginning of this year, southbound funds have accumulated a net purchase of HKD 82.028 billion, surpassing last year's total of HKD 80.79 billion, setting a historical record for the same period, indicating a surge in demand from mainland investors for Hong Kong stocks.

This marks the 25th consecutive month of net purchases of Hong Kong stocks by southbound funds. Cathay Pacific Securities stated that there is still room for increased allocation of southbound funds, with the annual net inflow expected to exceed HKD 1 trillion. In terms of allocation direction, over the past month, southbound funds have focused on buying leading internet companies, pharmaceuticals, banks, and insurance companies.

Southbound Funds' Purchases Exceed Full Year of 2024

Since the beginning of this year, southbound funds have accumulated a net purchase of HKD 82.028 billion, exceeding the full year of 2024's HKD 80.79 billion, and surpassing the total net purchases of southbound funds from 2022 to 2023.

Southbound funds continue to "recharge" Hong Kong stocks, showing characteristics of "fearless at high levels, aggressively buying at low levels." On a monthly basis, southbound funds have accumulated 25 months of net purchases of Hong Kong stocks. From January to April this year, the monthly net purchases of southbound funds exceeded HKD 100 billion, while in May, the net purchases dropped to about HKD 40 billion, but the buying momentum increased again afterward. Since July, southbound funds have accumulated a net purchase of HKD 88.835 billion.

Since the beginning of this year, the Hang Seng Index has risen by 26.56%, leading major global stock indices. China International Capital Corporation believes that the Hong Kong stock market remains active, with highly structured sector rotations closely related to ample liquidity. Among the major factors affecting the funding situation of Hong Kong stocks, in addition to the Hong Kong Monetary Authority's unexpected injection of funds from May to July, southbound funds are also a key support. Currently, the trading volume of southbound funds accounts for about 35% of the total trading volume of Hong Kong stocks.

In terms of funding categories, statistics show that the proportion of active public funds' holdings in Hong Kong stocks has increased from 25.8% at the end of last year to 32.5%, with the allocation scale of active public funds to Hong Kong stocks increasing by HKD 100 billion to HKD 120 billion this year. Additionally, insurance funds have steadily increased their purchases of high-dividend sectors in Hong Kong stocks, especially in the banking sector with higher dividend ratios. The scale of individual investors and private equity funds directly opening Hong Kong Stock Connect trading has also increased.

Southbound Funds Drive Narrowing of AH Premium in This Round

Recently, southbound funds have mainly been "sweeping" leading internet stocks in Hong Kong, as well as the pharmaceutical and banking sectors.

Since July, southbound funds have significantly purchased Kuaishou-W, Meitu, Horizon Robotics-W, etc. As of July 24, southbound funds held a total of 655 million shares of Kuaishou-W, an increase of 23.47 million shares since early July. Goldman Sachs stated that Kuaishou-W has performed excellently in the advertising and e-commerce sectors in the mainland market, with globally leading artificial intelligence capabilities and low valuations, and is optimistic about the contribution of Kuaishou's AI film tools to this year's performance In terms of valuation, the Hang Seng Stock Connect AH Premium Index fell to 123.4 points on July 25, hitting a new low since June 2020. Since the beginning of this year, the index has accumulated a decline of over 13%. The continuous inflow of southbound funds has become an important factor driving the Hong Kong stock market and influencing the trends of sectors and individual stocks.

The strategy research report from Xingzheng Securities believes that there has always been a significant liquidity gap between Hong Kong stocks and A-shares, which is also an important reason for the discount of many Hong Kong companies compared to other A-share companies. Since the beginning of this year, with various funds entering the Hong Kong stock market, liquidity in Hong Kong stocks has significantly improved, and the liquidity gap between Hong Kong stocks and A-shares has begun to narrow trendily.

The research department of CITIC Securities believes that the current narrowing of the AH premium is a repricing of Hong Kong stocks by southbound funds, especially the preference of southbound insurance funds for the dividends of Hong Kong stocks, which has driven the narrowing of the AH premium. This trend may continue in the future.

Author of this article: Tang Yanfei, Source: Shanghai Securities Journal, Original title: "AH Premium Continues to Narrow, Southbound Funds' Net Purchase Amount Exceeds Full Year of 2024"

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