The Hang Seng Index market experienced continuous adjustments last week, compounded by pressure from the Fed's interest rate cut expectations, which once again triggered market concerns about the financial aspects of Hong Kong stocks.

Since the launch of the market on January 23, the Hong Kong stock market has performed strongly. As of May 20, the Hang Seng Index, Hang Seng Technology Index, and Hang Seng State-owned Enterprises Index have all increased by more than 30%. However, previously, many institutions believed that the current round of the Hong Kong stock market was mainly based on transactional capital.

Overall, liquidity has always been an important factor affecting the performance of the Hong Kong stock market. In particular, macroeconomic fundamentals have not fluctuated significantly since the beginning of the year, and the influence of liquidity on the market continues to strengthen.

However, with the recent continuous correction of the Hang Seng Index, the money-making effect of the market has declined. The daily turnover of Hong Kong stocks also showed a marked contraction. As of May 20, the average daily turnover of the Hang Seng Index was about HK$138.1 billion on Sunday, down nearly 20% from the previous week's average daily turnover of HK$168.6 billion, raising market concerns about a short-term decline in capital.

However, Huafu Securities analysts Yan Xiang and Zhu Chengcheng pointed out in the May 21 report that judging from recent trend changes, there are signs of marginal improvement in the funding of various institutions.

Among them, what is most noteworthy is that not only has Hong Kong Stock Connect capital continued to flow in since the end of April. Although there is still a net cumulative outflow of funds from international intermediaries throughout the year, marginal flows have begun to gradually return. Furthermore, the rate of capital outflows from local intermediaries in Hong Kong has also slowed down.

On the other hand, although the cumulative net capital inflow from the Hong Kong Stock Exchange to the South has exceeded HK$200 billion since this year.

However, judging from the absolute market capitalization ratio, the current Hong Kong stock market is basically in a three-legged situation of foreign, Hong Kong, and domestic shareholding, and the influence of international institutions and local institutions in Hong Kong is still not small.

As of May 20, the market value of shares held by international intermediaries in the Hong Kong stock market was HK$8.5 trillion, accounting for 38%. The market value of shares held by local intermediaries in Hong Kong was HK$8.0 trillion, accounting for 36%. The market value of shares held by Hong Kong Stock Connect was HK$2.9 trillion, accounting for 13%.

Therefore, whether net inflows to the south can be maintained and whether net inflows of foreign capital continue to improve in the future are the keys to determining the short-term capital aspects of Hong Kong stocks.

Interestingly, according to a recent report from the strategy team of Huatai Securities, the net inflow of allocated foreign capital last week, as measured by EPFR, was corrected for the first time since the end of March, with a net inflow of US$86 million. Among them, passive foreign capital was the main driving force, with a net inflow of US$202 million.

According to Huatai Securities, in the context of domestic policy catalysts and improvements in overseas liquidity, the capital side may be the main driver of the current round of Hong Kong stock rebound. Domestic and foreign investors have joined forces to build an incremental environment for Hong Kong stocks, and the closing of short selling funds has also contributed to the main increase.

Looking ahead, Huatai Securities believes that the allocation space for Hong Kong stocks is expected to continue. The timing is the intersection of key domestic and foreign policy points in early to mid-June, and the space may match the high level at the end of July last year. According to market data, the Hang Seng Index hit a high of 20361.03 points in July of the previous year.

Editor/Jeffrey