Source: Finance Association

The Hang Seng Index continued to weaken and fluctuate downward in 2023, but southbound capital continued to flow into the Hong Kong stock market. The cumulative inflow volume once again reached a record high, once exceeding HK$2.9 trillion.

According to data from the Hong Kong Stock Exchange, the share of southbound capital in the average daily turnover of Hong Kong stocks also reached a new high in the first 10 months of 2023, reaching a level of 15%.

This also means that the influence of mainland capital, led by south-bound capital, in Hong Kong stocks is increasing day by day, and has become an important factor influencing the Hong Kong stock market.

In particular, against the backdrop of a weakening trend in the Hong Kong stock market, industries and individual stocks that receive the attention of south-bound capital often have a better chance of outperforming the market and breaking out of a relatively independent upward trend.

Next, we will sort out the trends in southbound capital over the past year to gain an insight into the current preferences of domestic investors for Hong Kong stocks.

Overall, Southbound Capital continued to increase its holdings in Hong Kong stocks in 2023, but inflows have weakened, and the style of operation has changed.

According to Wind data, as of December 29, Southbound Capital had a total annual turnover of HK$7.19 trillion, continuing to increase slightly from 2022.

It should be noted that the net southbound purchase volume in 2023 was approximately HK$318.84 billion, a decrease from HK$386.3 billion for the full year of 2022, and a year-on-year decline of about 20%.

Note: Changes in net monthly capital inflows to the south

Looking at it month by month, unlike the style of increasing positions steadily and continuing inflows in 2022, the overall operation of southbound capital in 2023 has obvious “high investment and low absorption” characteristics.

Among them, March-May and August-October were the peak periods for net capital inflows to the south during the year, and the Hang Seng Index fell by 7.84% and 14.77% respectively during the same period. After entering the fourth quarter, the decline in the Hang Seng Index slowed down, and the level of capital inflows to the south also declined at the same time.

From an industry perspective, during the year, southbound capital preferred sectors with high defensive attributes and at the bottom of the cycle.

According to Wind data, in 2023, the southbound capital flowed into the electricity and utilities sector of the Hong Kong stock market of nearly HK$250 billion.

In addition, industries with more certain fundamental expectations, such as telecommunications and energy, have also received net inflows of over HK$30 billion.

It is worth noting that Southbound Capital's attention to the Hong Kong technology sector and financial stocks weakened in 2023. Both of these major sectors received net inflows of more than HK$100 billion in 2022, and the scale of capital inflows declined markedly this year.

However, sectors at the bottom of the industry cycle, such as real estate, semiconductors, and biomedicine, continue to receive south-bound capital attention.

In terms of individual stocks, driven by the “China Special Price” market at the beginning of the year, the Chinese word became the main target for southbound capital to increase its positions.

Among the top 10 stocks with net southbound capital inflows in the past year, there are four “Chinese” state-owned enterprises.

According to the data,$CHINA MOBILE (00941.HK)$,$CNOOC (00883.HK)$,$PING AN (02318.HK)$,$CHINA SHENHUA (01088.HK)$Net purchases amounted to HK$21.587 billion, HK$10.754 billion, HK$2,835 billion and HK$2,827 billion respectively, totaling approximately HK$38 billion.

Meanwhile, shares of China Mobile, CNOOC, and China Shenhua Port stock prices increased by 37.55%, 50.46%, and 36.19% respectively in 2023, as Southbound Capital continued to increase their positions.

On the other hand, although the tech industry's overall attention has waned, some tech stocks have received southbound capital inflows.

which$MEITUAN-W (03690.HK)$,$SENSETIME-W (00020.HK)$,$KUAISHOU-W (01024.HK)$It received inflows of HK$20.49 billion, HK$4.637 billion and HK$3,756 billion respectively.

However, judging from the trend, Southbound Capital's purchase of technology stocks did not bring the expected benefits. The stock prices of Meituan, Shangtang, and Kuaishou fell by about 53.12%, 47.75% and 25.48% respectively this year. This also explains why Southbound Capital paid less attention to technology stocks in 2023 than in previous years.$TENCENT (00700.HK)$A net sale of nearly HK$5 billion was made by Southbound Capital throughout the year.

Looking ahead to 2024, the influence of southbound capital may be further strengthened, and at the same time, a new round of “position adjustments and stock exchanges” may also occur.

According to a report released earlier by Huatai Securities analyst Wang, since the Hang Seng Index underwent a major adjustment in August 2023, Hong Kong stocks as a whole showed a divergent trend of “southbound inflow+foreign capital outflow.”

However, judging from the operating style of southbound capital that continues to “throw high and take low”, there is insufficient confidence in the short-term market trend, and it is more biased towards structural opportunities in individual stocks and sectors.

Furthermore, after the decline in the Hang Seng Index slowed down at the end of the year, trading activity in the Hong Kong stock market rebounded, and the average daily turnover of southbound capital also rebounded by more than 10% compared to the previous period.

As the Federal Reserve turned to suspending interest rate hikes at the end of the year, market liquidity expectations eased. Southbound capital has increased positions in growth industries such as pharmaceuticals, and has weakened the allocation of consumer and value stocks.

Editor/Corrine