Source: Finance Association
Author: Yan Jun

Unafraid of adjustments in the US stock technology sector, Hong Kong stocks emerged from an independent market. The Hang Seng Index recovered its losses during the year and continued to rise.

As of the close of April 25, the Hang Seng Index rose 1.39% during the year. Looking at the market, there is a slight divergence, with innovative drugs leading the way, and the Internet, which previously led the rise, pullback. Agencies exchanged views and were not pessimistic. Recently, a 180-degree turnaround in the attitude of foreign institutions towards Hong Kong stocks and A-shares became a catalyst for the rebound of Hong Kong stocks.

Following UBS, Goldman Sachs, or the increase in stock ratings or overallocation of A-shares, the return of global capital to China has been further verified by data. According to the latest report released by the International Finance Association (IIF), in March of this year, the Chinese stock market and bond market saw net capital inflows simultaneously for the first time. The Chinese stock market and bond market absorbed 1.7 billion US dollars and 2.1 billion US dollars respectively.

Can the transition between funding levels continue? Will A-shares follow the rise of Hong Kong stocks in the future? What other sectors are worth looking forward to? Regarding these issues, some institutions said that the current round of the Hong Kong stock market has little to do with fundamentals. The recovery in risk appetite has brought about improvements at the capital level, which directly supports the rise in Hong Kong stocks. As for the aftermarket, foreign investors have increased their positions one after another, and the restoration of Hong Kong stocks, which has been undervalued for many years, has only just begun.

Hong Kong stocks take the lead; is foreign capital shifting higher or lower?

The International Finance Association (IIF) recently disclosed the March capital investment report, showing that the global investment market is shifting high and low, from US stocks to emerging markets.

According to the above report, foreign investors added about US$32.7 billion to their emerging market portfolios, of which the stock market absorbed 10.2 billion US dollars and the bond market absorbed 22.5 billion US dollars. This is the fifth consecutive month of net inflows of foreign capital into emerging markets.

There has also been a good improvement in China's net capital inflow. In March of this year, the Chinese stock market and bond market saw net capital inflows simultaneously for the first time. The Chinese stock market and bond market absorbed 1.7 billion US dollars and 2.1 billion US dollars respectively. The last simultaneous net inflow of foreign capital into Chinese equity bonds dates back nine months.

According to the industry, although the inflow scale is not large, there are clear signs of a shift in capital, and compared to the previous capital's preference for the bond market, the equity gap in the March data is far lower than the overall share of emerging markets.

There is also evidence from the actions of foreign institutions. Sunil Tirumalai, UBS's chief strategist for global emerging market stocks, raised ratings for A-shares and Hong Kong stocks. Goldman Sachs Asia Pacific analysts also recently revealed that Goldman Sachs has increased its holdings in the Asian Index and has also increased the allocation of Hong Kong's MSCI China Index products.

In addition to the stock market, there are also new trends in the layout of foreign capital in China's private equity sector.

According to market news on April 25, according to an internal memorandum, Morgan Stanley Asia Private Equity Fund is restructuring its team in the region. Among them, Morgan Stanley will separate a team focused on China from other divisions in the region, which will focus on investments in China's onshore and offshore markets. Additionally, the company has appointed Xu Jun, the current head of RMB investment funds, to be responsible for all private equity investments in China.

According to the industry, capital from the Asia-Pacific region showed signs of withdrawal from A-shares and Hong Kong stocks in August 2023, mainly to Japan. Since the fourth quarter of last year, it has been a window period of rapid decline in US bond interest rates, yet Hong Kong stocks and A-shares have hardly risen. Under the seesaw effect of the Chinese and Japanese markets, Nikkei instead led the world.

At the time, many investors were betting on the double appreciation of Japanese stocks and yen after the normalization of Japan's monetary policy, but this logic was falsified after the Bank of Japan began raising interest rates this year, and the yen depreciated even more rapidly. On April 25, UBS raised the exchange rate of the US dollar to the yen again. The news indicates that the recent strengthening of the US dollar has brought the dollar closer to 155 against the yen, the highest since June 1990. UBS said “Japanese securities have not actually interfered with the exchange rate, leaving the market slightly disappointed.”

The depreciation of the yen was most severe among major non-US currencies, so capital began to flow back to Hong Kong stocks. According to institutions, the core of this year's rise in Hong Kong stocks is the reverse interpretation of last year.

Southbound capital flows to Hong Kong stocks have exceeded HK$200 billion during the year

Meanwhile, since this year, the mainland's support for Hong Kong stocks from policy to capital has resonated with foreign investment.

In terms of policy, after the introduction of the new cooperation measures with Hong Kong, the significance of policy-friendly information was clear, including easing the scope of ETF products, incorporating REITs, optimizing mutual recognition of funds, and unblocking listed financing channels. It also helped to optimize the capital structure and reduce fluctuations in Hong Kong stocks.

According to some institutional analysis, domestic institutions were seriously injured in the process of bottoming out Hong Kong stocks in the past three years. Domestic investment limited the increase in Hong Kong stocks in the second half of last year. This situation has improved this year, and the allocation of domestic investors to sectors such as dividends and high dividends in Hong Kong stocks has increased markedly.

The Bosch Fund pointed out that Hong Kong stocks as a whole depend on the stabilization of the domestic economy and are gradually disrupted by changes in US interest rate cut expectations. Strategically, they seek certainty in products with high dividends and global pricing resources.

Huaxia Fund pointed out this year's changes. Due to the continuous decline in the past, Nanxia Capital's allocation of Hong Kong stocks was mainly focused on high-dividend stocks. In the first quarter of this year, A-shares also increased positions in high-dividend sectors of Hong Kong stocks with high AH premiums, such as banking, energy, utilities, etc. Recently, however, we have seen welcome changes in capital margins increasing highly relevant economic assets, such as the Hong Kong stock Internet industry; and the innovative pharmaceutical industry, which is nearing an inflection point, benefiting from interest rate cuts.

As of April 25, there has been a net inflow of southbound capital for 11 consecutive weeks since the Spring Festival. Of the last 30 days, 29 days showed a net inflow, with a cumulative net inflow of HK$206.326 billion from the beginning of the year to date. Among them, the south-bound capital flow industries ranked high in finance, utilities, etc.

The public offering increased slightly in the first quarter

According to the quarterly report data just disclosed, the public offering increased Hong Kong stock positions slightly in the first quarter of this year.

According to the Societe Generale Securities Research Report, active funds held 161,385 billion yuan in Hong Kong stocks in the first quarter of this year, an increase of 1.64% over the end of the previous quarter, and Hong Kong stock positions increased from 8.75% to 9.33%. On the industry side, publicly held positions in the energy, raw materials, and industrial sectors of Hong Kong stocks rose month-on-month, while positions in healthcare and non-essential consumption declined markedly.

Among the 10 billion star fund managers, representative products of fund managers such as Fu Pengbo, Zhu Lin, Zhao Feng, Qiu Dongrong, and Rao Gang have all increased their positions in Hong Kong stocks to varying degrees. Qiu Dongrong said that Hong Kong stocks are very cost-effective, and some companies are scarce. He is particularly optimistic about Hong Kong stocks in the fields of pharmaceutical technology, the Internet, and smart electric vehicles.

It is worth noting that although not many equity products are currently issued by wholly foreign-owned domestic public offering, the same emphasis is placed on Hong Kong stocks. For example, BlackRock China New Vision increased the Hong Kong stock layout in the first quarter of this year, and the share of Hong Kong stocks in the net fund value increased from 13.16% to 16.1%; Lubomai China, managed by Wei Xiaoxue, raised the Hong Kong stock allocation ratio to 12.17% during the same period, an increase of nearly 3 percentage points over the previous period.

After years of continuous decline in Hong Kong stocks, the allocation value is obvious. Huaxia Fund said that although it has accumulated a lot of “injured” capital in history, and investors have a strong wait-and-see attitude, considering that global capital flows benefit Hong Kong stocks, the gradual recovery of the economy is still a trend. Investors are advised to stay steady and gradually increase the allocation of industries such as Hang Seng Technology and Pharmaceuticals on the basis of high-dividend dividend assets.

Editor/Jeffy