Source: CITIC Construction Investment Securities Research
Author: Chen Guo, He Sheng
The core reason for the recent rise in Hong Kong stocks is an improvement in capital. The biggest suppression of Hong Kong stocks in the second half of last year was a shift in the systemic outflow of foreign capital to Japan. Recently, the focus of foreign capital allocation in the Asia-Pacific region has shifted again from Japan to Hong Kong stocks, and the liquidity of Hong Kong stocks has improved dramatically. In terms of domestic investment, driven by favorable policies and a high dividend market, southbound capital has recently increased dramatically, further consolidating the upward trend of Hong Kong stocks. We think the best long window for Hong Kong stocks this year has arrived.
The recent rise in Hong Kong stocks has mainly benefited from capital improvements. Foreign capital is the main force in increasing positions, and the return trend is expected to continue; driven by policies and high dividend prices, southbound capital is also increasing continuously.
1) The return of foreign capital is the core driving force behind the recent rise in Hong Kong stocks.
Since the concentrated withdrawal of foreign capital from AH shares in August of last year, capital from the Asia-Pacific region has mainly flowed to Japan, resulting in severe lack of liquidity in Hong Kong stocks and sluggish turnover. In October of last year, there was also a rare case where interest rates on US bonds fell sharply but Hong Kong stocks still did not obtain liquidity. The Hong Kong stock market continued to be sluggish and the Nikkei Index rose strongly. The most common logic exchanged at the time was to bet on the double appreciation of Japanese stocks and yen after Japan's monetary policy was normalized. However, this logic was falsified after the Bank of Japan began raising interest rates this year. The yen depreciated even more rapidly. The depreciation rate was the worst of the major non-US currencies, causing foreign capital to return to Hong Kong recently. This is also the core reason why the Nikkei Index has led the decline in developed markets since Japan raised interest rates on March 19, while Hong Kong stocks have led the rise. Basically, it is a reverse interpretation of last year.
2) Favorable policies resonate with the high dividend market, and southbound capital continues to grow.
On the policy side, on Friday, the Securities Regulatory Commission announced 5 cooperation measures with Hong Kong to introduce capital activity and enhance liquidity into the Hong Kong capital market. In terms of market conditions, the high dividend market has been popular since February of this year, and domestic institutions as a whole have adopted high dividends as the mainstream style. However, Hong Kong stocks have higher dividend rates and lower valuations than A-shares, and are more cost-effective, which is the core reason for attracting the continuous inflow of capital to the south. The allocation of domestic capital to Hong Kong stocks is also mainly concentrated in dividend stocks. Since this year, the south-bound sector has mainly ranked high in dividend sectors such as finance and utilities.
Driven by both domestic and foreign investment, Hong Kong stocks are expected to continue to rise. We believe that the best long window for Hong Kong stocks this year has arrived.
Risk warning: Geopolitical risks, the degree of tightening of the overseas Federal Reserve exceeds expectations, and the effects of implementing domestic economic recovery or steady growth policies fall short of expectations.
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1. Recently, the capital level of Hong Kong stocks has improved dramatically, and foreign capital has flowed back from Japan to Hong Kong stocks
Hong Kong stocks have risen rapidly recently, and the core is a marked improvement in the financial environment. The Hang Seng Index has fluctuated upward since February, and this week's gains have been particularly strong. We believe that the reason behind this is mainly an improvement in capital rather than an improvement in economic fundamentals. Currently, the focus of foreign capital allocation in the Asia-Pacific market is shifting from Japan to Hong Kong stocks, and the return of foreign capital has become the main driving force behind the recent rise in Hong Kong stocks. However, at present, the fundamentals of the domestic economy are still recovering weakly, and this does not constitute the main driving factor for the recovery of Hong Kong stocks.
The biggest suppressing factor for Hong Kong stocks in the second half of last year was the outflow of foreign capital. Since the concentrated withdrawal of foreign capital from AH shares in August of last year, capital from the Asia-Pacific region has mainly flowed to Japan, resulting in severe lack of liquidity in Hong Kong stocks and sluggish turnover. In October of last year, there was also a rare case where interest rates on US bonds fell sharply but Hong Kong stocks still did not obtain liquidity. The Hong Kong stock market continued to be sluggish and the Nikkei Index rose strongly, which also reflected that the Japanese market replaced the Hong Kong market as a destination for foreign capital allocation to the Asia-Pacific market. The most common logic exchanged at the time was to bet on the double appreciation of Japanese stocks and yen after Japan's monetary policy was normalized. However, this logic was falsified after the Bank of Japan began raising interest rates this year. The yen depreciated even more rapidly. The depreciation rate was the worst of the major non-US currencies, causing foreign capital to return to Hong Kong recently.
Recently, there has been a reversal in the flow of foreign capital, and the focus of allocation in the Asia-Pacific market has returned from Japan to Hong Kong stocks. On March 19, the Bank of Japan announced an interest rate hike of 10 basis points, raising the benchmark interest rate from -0.1% to 0-0.1%. This is the first time in 17 years that the Bank of Japan has raised interest rates, ending an 8-year negative interest rate policy. After the implementation of the policy, the yen depreciated beyond expectations, eroding the return on investment in the Japanese market, leading to a decline in the attractiveness of the Japanese market. Recently, the Nikkei Index plummeted, and foreign capital began to flow back into the Hong Kong stock market. Recently, major foreign-funded institutions have expressed their optimism about Hong Kong stocks. Against the backdrop of the continued return of foreign capital, the liquidity of Hong Kong stocks has improved markedly, and it is expected that they will continue to rise.
2. Favorable policies resonate with the high dividend market, and southbound capital continues to grow
In terms of domestic investment, there has recently been a sharp increase in southbound capital. The turnover of Hong Kong Stock Connect rose sharply in March. Hong Kong Stock Connect (Shanghai) increased 66% year over year and Hong Kong Stock Connect (Shenzhen) increased 84% year over year. Recently, the Guangdong branch of the People's Bank of China reported on the cross-border banking connection business in March 2024. Nanxiang Connect added 23,237 investors in March, 12.78 times the number added in February (1,818); the amount in March was 13.106 billion yuan, 8.84 times that of February (1,483 billion yuan). Among them, Nanxiang Connect also contributed the main capital increase.
We believe that the increase in southbound capital is mainly driven by favorable policies and a high dividend market.
In terms of policy, the Securities Regulatory Commission announced 5 cooperation measures with Hong Kong last Friday, including easing the scope of ETF products, incorporating REITs, supporting RMB trading counters, optimizing mutual recognition of funds, and unblocking listing financing channels. The new regulations will help unblock connectivity mechanisms, introduce active capital into the Hong Kong capital market, and enhance liquidity.
On the market side, domestic institutions were heavily injured in Hong Kong stocks in the previous three years, and frequently undercut duvet covers at the end of '21, Q2, and the beginning of '23. As a result, restrictions on Hong Kong stocks have increased since the second half of last year. In particular, the turnover of Hong Kong stocks has basically reached its lowest position in the past 5 years after the internet plummeted on December 22 last year. The high dividend market has been popular since February of this year, and domestic institutions as a whole have adopted high dividends as the mainstream style. However, Hong Kong stocks have higher dividend rates and lower valuations than A-shares, and are more cost-effective, which is the core reason for attracting the continuous inflow of capital to the south. The allocation of domestic capital to Hong Kong stocks is also mainly concentrated in dividend stocks. Since this year, the south-bound sector has mainly ranked high in dividend sectors such as finance and utilities.
In summary, Hong Kong stocks are expected to continue their upward trend, driven by the return of foreign capital and the increase in domestic capital inflows. We believe that Hong Kong stocks currently have a high allocation value, and the best long window for Hong Kong stocks this year has arrived.
Risk warning
(1) Geopolitical risks. If Sino-US relations are not managed well, it may lead to an intensification of confrontation between China and the US in the fields of politics, military affairs, technology, and diplomacy. At the same time, geopolitical hot spots such as the Russian-Ukrainian conflict and the Middle East issue may face the risk of worsening, and if a crisis occurs, it may adversely affect the market.
(2) The degree of tightening of the overseas Federal Reserve has exceeded expectations. If the US economy continues to be resilient and economic data such as the labor market and retail sales perform well, then the risk of a US recession may face revaluation, and the risk of inflation will also face a rebound. The Federal Reserve's path of austerity against inflation continues, global liquidity easing falls short of expectations, and the domestic equity market's denominator side will inevitably also be under pressure.
(3) The effects of implementing domestic economic recovery or steady growth policies fall short of expectations. If subsequent domestic real estate sales and investment data are slow to recover, the long-term accumulated risk of urban investment debt repayment is fermented, and economic recovery is ultimately falsified, then the overall market trend will be under pressure, and overly optimistic pricing expectations will be revised.
Editor/jayden