Massive Capital Inflow Amidst HK Stock Turmoil: Why?

Hong Kong stocks have embarked on a journey of valuation repair since early August, and the sudden surge in the A-shares market at the end of September also "added fuel to the fire" for Hong Kong stock trading sentiment.

However, after digesting the previous excitement, Hong Kong stocks have recently returned to a consolidation trend, with consecutive pullbacks erasing all the gains since October. Nevertheless, as Hong Kong stocks approach support levels, contrarian funds are showing a warming trend, with industrial capital buybacks and the willingness of funds to flow southward strengthening once again.

01

Southbound funds have once again become the "mainstay"

The scale of net purchases continues to expand

This year, southbound funds have continued to flow into Hong Kong stocks, with a cumulative net inflow of over 53 billion Hong Kong dollars from January to October, the fastest inflow rate in history.

From October 14th to 18th, the weekly net inflow of southbound funds reached 24.424 billion Hong Kong dollars, a new high since late June this year. On October 21st, the southbound net inflow reached 12.43 billion Hong Kong dollars, setting a new high since March 23rd.

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Looking at the net inflow of sub-sectors, southbound funds may prefer a barbell strategy combining technology and dividends.

In the past 7 days, the top net purchases of southbound funds were Alibaba, Xiaomi Group, SMIC, Tencent Holdings, Geely Automobile, China Resources Power, China Traditional Chinese Medicine, Sunac China, China Life, and GCL Technology. Among them, Alibaba, SMIC, Xiaomi Group, and Tencent Holdings are all among the top ten weighted stocks of the Hang Seng Technology Index.As of October 25th, the net purchase amount of Southbound funds this year has reached 576.461 billion Hong Kong dollars. If the current inflow rate of Southbound funds continues, this year's net purchase amount may set a historical record high.

Data shows that although there are still more than two months left in the year, the net purchase amount of Southbound funds is already the second-highest in history, only behind the 672.1 billion Hong Kong dollars in 2020. This trend indicates that mainland investors' confidence in the Hong Kong stock market may be gradually increasing.

02

Hong Kong stock buybacks heat up

Industrial capital shows "power"

This year, the overall buyback of Hong Kong stocks has noticeably increased. What's more worth mentioning is that although Hong Kong stocks have adjusted again recently, buybacks continue to heat up.

As of October 23rd, 253 Hong Kong stocks have been repurchased by companies this year, with 55 individual stocks having a cumulative repurchase amount exceeding 100 million Hong Kong dollars. The overall repurchase amount has exceeded 220 billion Hong Kong dollars, far exceeding the repurchase scale for the whole year of 2023 (126.9 billion Hong Kong dollars).

Since the beginning of this year, Tencent Holdings, Meituan, Xiaomi Group, Kuaishou, and other Hang Seng Technology Index constituent stocks have all carried out substantial cumulative buybacks, with repurchase amounts ranking in the top ten of Hong Kong stocks. These internet technology companies' large and continuous buyback actions may help stabilize market prices, improve shareholder returns, and boost market confidence.What to look for in the Hang Seng Index next?

CITIC Construction Investment believes that the technology and internet sectors in the Hang Seng Index have shown a significant recovery in profits, benefited from dividend and buyback trends in terms of valuation, and have gained favor from foreign capital in terms of liquidity, making them the most noteworthy sectors.

Puyin International suggests that the first phase of the broad market rally in China's stock market may have ended, and the market may have entered the second phase of consolidation and volatility. It recommends paying attention to some underperforming stocks in the Hang Seng Index that have solid fundamentals and long-term investment value, such as high-quality high-dividend stocks that are expected to benefit from the ongoing trend of interest rate declines, and high-performing blue-chip stocks with significant buybacks.

Guotai Junan believes that the Hang Seng Index's valuation has fallen, and the risk premium has increased, indicating that there is still room for upward movement. As global central banks enter a loose monetary cycle and domestic policy efforts are still expected, the expected improvement in both the numerator and denominator, combined with the lifting of the market sentiment's baseline range, opens up space for valuation/risk premium rates. The Hang Seng Index has once again entered a configuration range, and it is recommended to patiently layout, with a structural preference for growth stocks sensitive to interest rates that are experiencing a recovery in momentum, and newly recommended materials with high dividends.

Regarding the current valuation repair situation of the Hang Seng Index, as of October 25th, the Hang Seng Index's PE valuation is 9.83 times, which is at the 43.38% historical percentile over the past 10 years. The risk premium, after a series of market rallies and recent consolidations, has fallen from a high of 9.64% in mid-September to 8.01%, still above the average of 6.71%.

Under the main narrative of interest rate cuts and recovery, the Hang Seng Index is well-positioned for allocation. We are optimistic about the upward elasticity of the Hang Seng Index's technology sector and the configuration value of the Hang Seng Index's broad-based stocks—

The start of the interest rate cut cycle is expected to directly benefit growth sectors sensitive to interest rates (such as internet platforms, technology hardware, biopharmaceuticals, etc.). Coupled with the expected continued outperformance of earnings by leading companies in Hong Kong and increasing buybacks and dividends, it is expected to attract inflows from foreign capital and the Southbound funds.

Significant policy reinforcement in mainland China, covering sectors such as consumption, finance, and real estate within the domestic demand recovery chain, is also expected to benefit the broad-based Hang Seng Index.