According to CICC, this week, southbound capital shifted to an Outflow of 8.69 billion HKD (vs. an Inflow of 7.27 billion HKD last week), with an average daily Outflow of 1.74 billion HKD (vs. an average daily Inflow of 1.82 billion HKD last week). Among them, on Monday, there was a net Outflow of 18.53 billion HKD, the largest single-day Outflow since February 2021. At the individual stock level, the highest Shareholding increases were in China Construction Bank Corporation, Bank Of China, and CM BANK, while Shareholding decreases were seen in Tencent, Xiaomi Group, and Semiconductor Manufacturing International Corporation.
Since mid-April, southbound Inflows have significantly slowed down, even turning into a net Outflow recently. For instance, this week saw an Outflow of 8.69 billion HKD, creating the largest weekly Outflow since early February 2024, and there has been an Outflow of 1.42 billion HKD from May to now, marking the first monthly Outflow since June 2023.
Possible reasons for the recent slowdown or Turn to Outflow in southbound capital include:
1) The market sentiment has stabilized, leading some investors to take profits;
2) The previously strong Inflow may have been somewhat overzealous and overdrawn, especially with an overemphasis on 'southbound pricing power'. Additionally, the main participants in the southbound Inflow are individuals and trading funds, which can be easily influenced by emotions and the market itself;
3) A surge in Hong Kong stock placements and some leading stocks underperforming expectations;
4) New regulations on public fund performance benchmarks may cause emotional fluctuations. As of the first quarter, the domestic active equity funds' holdings in Hong Kong stocks were 30.8% vs. the average weight of related indices in the benchmark of 16.5%, with about 70% of funds overweighting Hong Kong stocks compared to the benchmark.
Since March, southbound capital has become the main force in the Hong Kong stock market's funding, primarily driven by trading and passive funds (individuals). However, it may not be as significant as expected for institutions such as public funds and insurance. Our estimates suggest that the relatively confirmed southbound incremental capital for the rest of the year is about 200-300 billion HKD, with a total annual Inflow around 800-1000 billion HKD.
Looking forward, the long-term allocation value remains, but short-term fluctuations are also normal. In addition, active equity public offerings account for only 9.6% of southbound investments, and even if still regarded as having alpha opportunities, it may not necessarily trigger significant portfolio adjustments.
Regarding foreign capital, EPFR data (as of this Wednesday):
Active foreign Outflow has expanded, with an Outflow of 0.1 billion USD from A-shares (vs. last week's Outflow of 0.04 billion USD), and an Outflow from Hong Kong stocks and ADRs of 0.33 billion USD (vs. last week's Outflow of 0.12 billion USD); the largest Outflows are from funds focusing on China and Emerging Markets.
Passive foreign Inflow has accelerated, with an Inflow of 0.4 billion USD into A-shares (vs. last week's Inflow of 0.26 billion USD), and an accelerated Inflow of 1.23 billion USD into Hong Kong stocks and ADRs (vs. last week's Inflow of 0.37 billion USD); the Inflow is mainly from funds focusing on China and Emerging Markets.
Editor/Somer
