Cathay Securities Overseas: Under the Federal Reserve's resumption of interest rate cuts, there is a possibility of an unexpected return of foreign capital to the Hong Kong stock market

According to Zhitong Finance APP, the overseas strategy team of Cathay Securities has released a research report stating that since May this year, the Sino-U.S. economic and trade negotiations have shown a phase of easing, coupled with the continued fermentation of the weak dollar logic, foreign capital has temporarily flowed back into Hong Kong stocks. Looking ahead, the recent U.S. Federal Reserve policy has clearly shifted, with Powell unexpectedly adopting a dovish stance at the annual meeting. Currently, the market expects that the Federal Reserve is highly likely to restart the interest rate cut cycle in September this year, with a total of 2 rate cuts within the year. The dollar may continue to show a weak and volatile pattern, while the subsequent stabilization of Sino-U.S. trade relations is expected to provide a good macro environment for marginal improvement of foreign capital and even exceed expectations for return, with foreign capital likely to continue the trend of inflow since May.

From the perspective of existing stock, the proportion of foreign capital holdings in Hong Kong stocks is high, with a preference for the technology and internet sectors that represent the new economic drivers of China, as well as the large financial sector relying on the national credit system. From the perspective of flow, during the period from January 24 to April 25, foreign capital significantly flowed out of Hong Kong stocks, but there was a counter-trend inflow into some technology and consumer sectors, with consistent inflows into technology since May 25. As the negative factors suppressing Hong Kong's technology sector show positive changes, the Hong Kong technology sector with low valuations and better fundamentals is expected to continue to attract foreign capital.

The main points of the report are as follows:

Under the restart of interest rate cuts by the Federal Reserve, there is a possibility of exceeding expectations for foreign capital inflow into Hong Kong stocks. In recent years, influenced by global geopolitical patterns and other factors, foreign capital has cumulatively flowed out of the Hong Kong stock market by more than HKD 670 billion since September 2020, and the current proportion of foreign capital allocated to Chinese assets has reached a historical low. After experiencing rapid outflows in the past few years, foreign capital, which is sensitive to geopolitical risks, may have cleared out, and the current structure of existing foreign capital may gradually stabilize.

Since May, foreign capital has been flowing back into Hong Kong stocks. Since May this year, the Sino-U.S. economic and trade negotiations have shown a phase of easing, coupled with the continued fermentation of the weak dollar logic, foreign capital has temporarily flowed back into Hong Kong stocks, with long-term stable foreign capital accumulating inflows of about HKD 67.7 billion from May to the end of July, and short-term flexible foreign capital inflowing about HKD 16.2 billion. At the beginning of August, as market attention to Sino-U.S. trade negotiations heated up again, the previously flowing back foreign capital experienced some fluctuations. As of August 19, long-term foreign capital had cumulatively flowed out more than HKD 40 billion, while short-term foreign capital flowed out about HKD 17 billion.

Looking ahead, the recent U.S. Federal Reserve policy has clearly shifted, with Powell unexpectedly adopting a dovish stance at the annual meeting. Currently, the market expects that the Federal Reserve is highly likely to restart the interest rate cut cycle in September this year, with a total of 2 rate cuts within the year. The dollar may continue to show a weak and volatile pattern, while the subsequent stabilization of Sino-U.S. trade relations is expected to provide a good macro environment for marginal improvement of foreign capital and even exceed expectations for return, with foreign capital likely to continue the trend of inflow since May.

The previous text mentioned that there are recent signs of marginal stabilization and improvement in foreign capital, and with the subsequent easing of overseas liquidity, foreign capital is expected to become an unexpected variable affecting Hong Kong stocks this year. The following will further analyze the preferences of foreign capital in Hong Kong stocks in recent years and the recent changes.

From the perspective of stock volume, foreign capital in Hong Kong stocks particularly favors technology and finance. For a long time, foreign capital has dominated most sub-sectors in Hong Kong stocks, especially in the technology internet and large financial sectors, where the proportion is significantly higher. Specifically, as of August 26, 2025, the sectors with the highest foreign capital proportion in Hong Kong stocks are: retail (overall foreign capital proportion 77%, of which long-term stable type 57%, short-term flexible type 20%, same below), insurance (75%, 60%, 15%), software and services (74%, 51%, 22%), media (69%, 61%, 7%).

Referring to the experiences of the Taiwan and South Korean stock markets, as well as A-shares, foreign capital favors not specific sectors but regionally distinctive assets with fundamental advantages. The characteristics of foreign capital holdings in Hong Kong stocks also confirm this point, as foreign capital prefers the technology internet sector representing China's new economic momentum and the large financial sector relying on the national credit system. Additionally, from the perspective of profitability, the preference of foreign capital holdings can also be reflected; since 2020, the central value of foreign capital holdings ROE (TTM, overall method) in Hong Kong stocks has been 10.7%, with the latest at 13.4%, significantly higher than the overall Hong Kong stocks at 6.8% and 7.0%. This also confirms that foreign capital prefers sectors with strong profitability and fundamental advantages.

From the perspective of capital flow, since 2024, foreign capital has been flowing into certain technology and consumer sectors against the trend, with consistent inflows into technology since May. At the beginning of 2024, Hong Kong stocks began to recover from the bottom, but foreign capital continued to trend out until signs of improvement appeared in May this year. Therefore, the foreign capital flow situation from January 2024 to April 2025 and from May 2025 to the present has been examined. During the period from January 2024 to April 2025, foreign capital increased its holdings in hardware (with a total inflow of HKD 8.4 billion, of which long-term stable type HKD 9.3 billion, short-term flexible type -HKD 0.9 billion, same below) and food products (HKD 2.2 billion, HKD 1.5 billion, HKD 0.7 billion).

As for the sectors experiencing outflows, most industries are facing reduction pressure, with the leading outflow sectors being banking (-HKD 206.7 billion, -HKD 178.4 billion, -HKD 28.6 billion), retail (-HKD 184.7 billion, -HKD 98.6 billion, -HKD 86.2 billion), and software services (-HKD 103.5 billion, -HKD 97.4 billion, -HKD 6.1 billion). Overall, during the period from January 2024 to May 2025, foreign capital increased its holdings in technology and consumer sub-sectors while significantly reducing its holdings in the heavily weighted large financial and technology internet sectors. This may be due to foreign capital's consideration of geopolitical factors and other reasons, leading to a reduction in exposure to heavily weighted sectors Let's observe the recent foreign capital trends. Since May, both long-term and short-term foreign capital have consistently flowed into technology sectors such as software and hardware, while there are divergences in real estate and pharmaceuticals, with a consistent outflow from dividend and retail sectors. Specifically:

① Sectors with consistent inflows: Since May, long-term and short-term foreign capital has mainly flowed back into the technology sector, with software and services (accumulated foreign inflow of HKD 76 billion since May 25, including HKD 59.1 billion from long-term stable inflows and HKD 16.9 billion from short-term flexible inflows, the same below), and technology hardware (HKD 33.4 billion, HKD 24.6 billion, HKD 8.8 billion) leading the inflows. This may be due to the accelerated iteration of AI technology represented by DeepSeek, combined with support from industrial policies, enhancing foreign consensus on the currently undervalued Hong Kong stock technology sector. Additionally, durable consumer goods (HKD 21.6 billion, HKD 2.8 billion, HKD 18.8 billion) and materials (HKD 17.8 billion, HKD 9.1 billion, HKD 8.7 billion) also saw significant inflows from both long-term and short-term foreign capital.

② Sectors with divergent inflows: The sectors with significant divergence are mainly concentrated in biopharmaceuticals, real estate, and the automotive field. In biopharmaceuticals (-HKD 11.2 billion, HKD 6.8 billion, -HKD 18 billion), long-term funds are still increasing their holdings, but there is a clear short-term outflow. This may be due to funds still being optimistic about the fundamentals of innovative drugs, but since the rise in innovative drug market this year has been considerable, short-term funds tend to take profits at this stage. Additionally, the automotive sector (-HKD 8.9 billion, -HKD 23.7 billion, HKD 14.8 billion) and real estate (HKD 1.3 billion, -HKD 10.5 billion, HKD 11.8 billion) have seen more flexible foreign capital buying recently due to short-term policy or event catalysts, but long-term foreign capital is still in an outflow trend.

③ Sectors with consistent reductions: Both types of foreign capital have jointly exited from banks (-HKD 49.4 billion, -HKD 41.2 billion, -HKD 8.2 billion), energy (-HKD 15.2 billion, -HKD 7.6 billion, -HKD 7.5 billion), and utilities (-HKD 9.8 billion, -HKD 7 billion, -HKD 2.8 billion), which are dividend-type assets. At the same time, due to the negative impact of the food delivery war on profitability, the retail sector has also seen significant reductions from both long-term and short-term foreign capital (-HKD 56.2 billion, -HKD 13.4 billion, -HKD 42.7 billion).

The Hong Kong stock technology sector, with low valuations and better fundamentals, is expected to continue to attract foreign capital. Currently, the valuation of the Hong Kong stock technology sector is not high, with the Hang Seng Technology PE (TTM) at the 18% percentile since data has been available for 20 years. As AI leads the technology cycle upward, the upward space for the scarce Hong Kong technology leaders may be larger. Since the second quarter, the performance of the Hong Kong stock technology sector has been fluctuating weakly, mainly due to internet capital expenditures falling short of expectations and the negative impact of the "food delivery war" on the profitability of some internet platform companies. Recently, this suppressive factor may have improved: first, with the marginal easing of Sino-U.S. trade, technology export controls have loosened; second, the impact of the "food delivery war" on internet companies may be nearing its end, as this week the National Development and Reform Commission and other departments drafted the "Internet Platform Pricing Behavior Rules" to regulate price competition among internet platforms Recently, the funding situation for Hong Kong's technology sector has shown positive changes, with both short-term and long-term foreign capital consistently flowing into the Hong Kong technology sector. Looking ahead, the leading companies in Hong Kong's technology sector are widely distributed across the AI industry. As the trend of the AI industry becomes further confirmed, the leading companies in Hong Kong's technology sector will fully benefit from the dividends of the AI industry transformation, and their upward elasticity may be even greater.

Risk Warning: The implementation progress of stable growth policies may fall short of expectations, and the recovery of the domestic economy may not meet expectations