Source: CSC Research Investment Strategy Team
Authors: Chen Guo, He Sheng
The core reason for the recent strong rise in Hong Kong stocks is an improvement in capital. After completely dismantling the current round of capital inflows, we believe that southbound capital played a leading role in this round of growth. The inflow has continued since February, and gradually spread from the dividend sector to other sectors. Foreign capital poured into Hong Kong stocks sharply after April 11, and resonance with domestic capital contributed to a strong rise in Hong Kong stocks in this round.
Looking ahead to the future market, we believe that the current round of gains in Hong Kong stocks is expected to continue, with the Hang Seng Technology Index gradually switching to a high-dividend sector. In the future, the pricing power for southbound capital is expected to increase dramatically, replacing the style where foreign capital dominates Hong Kong stocks. The main allocation of Hong Kong stocks this year is still the dividend sector, and the Science Network sector can focus on leading stocks that are improving.
Core views
●What is the background and characteristics of the recent rise in Hong Kong stocks?
The main background of the current rise in Hong Kong stocks is an improvement in capital due to the resonance of domestic and foreign investment. The main characteristic is the reverse rise in interest rates on US bonds.
●What is the current inflow rate and distribution of capital?
Southbound capital played a leading role in this round of growth. Since February 19, inflows have continued, gradually spreading from the dividend sector to the media, computer, automobile and other science and network sectors. Foreign capital inflows have increased markedly since April. The Hong Kong dollar has continued to strengthen recently, which confirms the return of foreign capital. The allocation of foreign capital in this round is relatively balanced, and it is not concentrated only on the science network sector. Currently, Hong Kong stocks maintain a clear advantage in the Asia-Pacific market. Recently, overseas liquidity margins have loosened, and domestic and foreign capital inflows are expected to continue in the short term.
●How much room is there for growth in this round?
The current rise in Hong Kong stocks is mainly benefiting from capital improvements. Against the backdrop of the recent continuous introduction of favorable real estate policies, domestic fundamentals are expected to recover faster. The current capital inflow into Hong Kong stocks is highly certain. Combined with the fundamental recovery trend, the rise is expected to continue.
●How will the style of Hong Kong stocks change in the future?
Historically, Hong Kong stocks were dominated by foreign capital and Hong Kong capital, and southbound capital continued to flow in. Currently, the Hong Kong stock market is showing a situation where domestic capital, foreign capital, and Hong Kong capital are tripartite. With policy support, the right to price southbound capital is expected to increase dramatically. Foreign investors mainly prefer science and network enterprises; domestic capital allocation is more balanced and diversified, and they prefer central state-owned enterprises.
●What is the current configuration logic?
The main allocation of Hong Kong stocks this year is still the dividend sector. Under the AH share premium phenomenon, the dividend ratio of Hong Kong stocks is higher, and the allocation is relatively cost-effective. The Science Network sector can focus on leading stocks that have improved recently.
I. Introduction
Recently, Hong Kong stocks have continued to rise strongly, drawing widespread attention in the market. The market has been rising strongly since April 22nd, and as of May 3,$Hang Seng Index (800000.HK) $The cumulative increase in the past two weeks was 13.88%.$Hang Seng Technology Index (800700.HK) $The cumulative increase was 21.14%. In “Can the current Hong Kong stock market continue?” We have already pointed out in the article that the recent rise in Hong Kong stocks has mainly benefited from capital improvements. Foreign capital has been the main force in increasing positions recently, and the return trend is expected to continue; driven by favorable policies and high dividend markets, southbound capital also continues to flow in. The purpose of this article is to further disassemble the current market of Hong Kong stocks and answer the following five questions: What is the background and characteristics of the recent rise in Hong Kong stocks? What is the current inflow rate and distribution of capital? How much room is there for growth in this round? How will the style of the Hong Kong stock market change in the future? What is the current configuration logic?
II. What is the background and characteristics of the recent rise in Hong Kong stocks
The main background of the current rise in Hong Kong stocks is an improvement in capital due to the resonance of domestic and foreign investment. The main characteristic is the reverse rise in interest rates on US bonds.
Historically, the Hong Kong stock market has been significantly affected by the Federal Reserve's monetary policy. The Hong Kong stock market had clear and rapid positive feedback on overseas monetary policy. Historically, after the Federal Reserve's monetary policy tone began to shift, such as January 2001, September 2007, July 2008, October 2018, July 2019, and February 2020, the Hong Kong stock market usually bottomed out and rebounded within 1-2 months.
Since the second half of last year, there have been frequent divergences between Hong Kong stocks and the Federal Reserve's monetary policy changes. After August of last year, a large amount of foreign capital withdrew from the Hong Kong stock and A-share markets and went to the Japanese market, betting on the double appreciation of Japanese stocks and yen after the normalization of Japan's monetary policy. 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 Nikkei Index rose strongly during the same period, reflecting that the Japanese market replaced the Hong Kong market as a destination for foreign capital allocation in the Asia-Pacific market at the time. In a recent reverse interpretation of logic, the yen depreciated beyond expectations after the Bank of Japan raised interest rates, and a large amount of foreign capital flowed out of Japan and returned to Hong Kong stocks. Hong Kong stocks rose strongly against the backdrop of the Federal Reserve's continuous postponement of interest rate cuts, which once again explains the divergence between Hong Kong stock liquidity and the Federal Reserve's monetary policy.
In line with the recent characteristics of the Hong Kong stock market, we have further refined the Hong Kong stock analysis framework. The past analysis framework for Hong Kong stocks focused on overseas liquidity and domestic fundamentals. As an offshore market, the Hong Kong market resonates closely with the world in terms of liquidity on the denominator side; since mainland companies have gradually become the subject of Hong Kong stock listings in recent years, the molecular side is closely related to domestic fundamentals. Furthermore, overseas risk factors (such as war factors, debt crisis, energy crisis, etc.) also need to be considered separately. Recent core changes in the Hong Kong stock analysis framework are the intensification of liquidity competition in the Asia-Pacific market, and the importance of horizontal comparison in the Asia-Pacific market has increased markedly. In addition to focusing on the total amount of overseas liquidity dominated by the Federal Reserve's monetary policy, more attention should also be paid to the allocation flow of foreign capital in the Asia-Pacific market.
3. What is the current inflow rate and distribution of capital?
We have reviewed the pace and distribution of capital inflows to Hong Kong stocks since this year, and found that the current round of capital inflows to Hong Kong stocks was led by a southward trend, followed by foreign investment and resonated with domestic capital, driving a strong rise in Hong Kong stocks in the current round.
Domestic capital: Southbound capital flows in first, spreading from the dividend sector to other sectors
After the A-share liquidity crisis in January of this year, southbound capital began to gradually flow into Hong Kong stocks in February. Since February 19, the cumulative net purchase amount of Hong Kong Stock Connect has continued to increase, and the net purchase amount in a single day has continued to expand. The liquidity of Hong Kong stocks improved markedly in March of this year. The turnover of the Hang Seng Index rose sharply from $1709.3 billion in February to $223.2 billion in March, and the April turnover remained high at 2245 billion yuan. Judging from the growth rate, the net single-day purchase amount of Hong Kong Stock Connect is currently slowing down in the second phase, but the inflow continues.
Judging from the distribution of southbound capital, it is spreading from the dividend sector to other sectors, and allocations tend to be diversified. Southbound capital flowed into Hong Kong stocks after the A-share liquidity crisis in January of this year, and dividend assets with safe-haven properties were first allocated. Recently, with foreign capital inflows and overall market improvements, the risk appetite of southbound capital has increased, and capital has gradually spilled over to new economic sectors such as media and new energy vehicles. Looking at the allocation of the Hong Kong Stock Connect industry, as of April 30, the allocation for the past quarter was mainly concentrated in industries with high dividend rates such as banking, petroleum and petrochemicals, and telecommunications. Since January, capital has gradually spilled into the new economy sector, and the media industry, which is dominated by Internet companies, has jumped to second place, accounting for 9.9% of Hong Kong Stock Connect's net inflow. In the past week, media, computers, and automobiles accounted for 9.5%, 7.4%, and 7.1% of the net inflow of Hong Kong Stock Connect, respectively. Southbound capital industry allocations have become more diverse.
In terms of individual stock allocations on Hong Kong Stock Connect, we can also see the trend of diversification of southbound allocations. Since the beginning of this year, Hong Kong Stock Connect's heavy stock holdings have focused first on high-dividend companies such as large state-owned banks, “three barrels of oil”, and telecommunications companies. The Bank of China has steadily ranked first in inflows, and the inflow trend continues;$CNOOC (00883.HK) $,$China Mobile (00941.HK) $There has also been a clear inflow of other companies since February 19, but recently the inflow trend has clearly slowed down. On March 28, Xiaomi officially released the SU7, and the Hong Kong Stock Connect capital has continued to flow in since March 18$Xiaomi Group-W (01810.HK) $. April 9,$ Tencent Holdings (00700.HK) $A major repurchase plan was implemented, and 3.28 million shares of the Company were repurchased at HK$1,001 billion. Since the end of March, Hong Kong Stock Connect funds have also continued to flow into Tencent. Also, almost a week$Shop-W (00020.HK) $,$IDEAL CAR-W (02015.HK) $,$Kuaishou-W (01024.HK) $It also ranks high among individual stocks flowing into the Hong Kong Stock Connect.
Foreign capital: The return from Japan to Hong Kong stocks, with a balanced allocation
After the Bank of Japan announced an interest rate hike on March 19, the yen fell beyond expectations, triggering the withdrawal of foreign capital from the Japanese market and back to Hong Kong stocks. The recent strengthening of the Hong Kong dollar confirmed the large inflow of foreign capital. The yen continued to depreciate after the Bank of Japan raised interest rates on March 19. The Bank of Japan meeting on April 26 did not introduce any quantitative austerity (QT) measures expected by the market. The sell-off of yen in the foreign exchange market intensified again, and capital continued to flow out of the Japanese market. Looking at the Hong Kong dollar exchange rate, the Hong Kong dollar began to depreciate at the end of March, fell to a low of 7.8360 on April 12, then turned volatile. It continued to strengthen after April 23, and had appreciated to 7.8123 as of May 3.
Since April 11, major foreign banks have been bullish on Hong Kong stocks. The focus of foreign capital allocation in the Asia-Pacific market has once again shifted to Hong Kong stocks. The short selling data also reflects the continuous recovery in foreign investment sentiment. The market-wide short selling ratio peaked at 32.29% on March 22, then fluctuated downward, falling to 17.23% as of April 29. millet,$Alibaba-SW (09988.HK) $The number of shares sold short and the number of open short positions of other companies have declined markedly recently.
Judging from the industry allocation, unlike the previous heavy warehouse technology network sector, the allocation of foreign capital reimbursement this time is quite balanced. Tencent Holdings, which has the highest foreign position, has not increased its positions recently, and it is not obvious that it is short selling and closing positions. Technology Network sector Ali,$Jingdong Group (09618.HK) $, Xiaomi's increase in positions is quite obvious; this round of foreign capital reimbursement has also been allocated in energy, finance, and other sectors.$AIA (01299.HK) $Foreign capital inflows are evident. Compared with previous preferences for the Internet, this time the allocation of foreign capital is more diverse and balanced. Since the return of foreign capital began on March 19, the Hang Seng Technology Index has not led the Hang Seng Index, which also shows that foreign investment has not concentrated on the Technology Network sector this time.
Judging from the horizontal comparison of the Asia-Pacific market, Hong Kong stocks maintain their competitive advantage. With March 19 as the base period, Hong Kong stocks significantly outperformed other markets in the Asia-Pacific region. The Hong Kong dollar also showed strong performance, and foreign capital is motivated to continue to flow into Hong Kong stocks.
Overseas liquidity margins have been loosening recently, and foreign capital inflows are expected to continue. Powell expressed an overall bias at the April FOMC meeting, and the April US non-agricultural data dropped sharply from 303,000 last month to 175,000, lower than the forecast of 240,000. After the weak April Non-Farm Report was released, the CME FedWatch tool showed that traders advanced their expectations for the Fed's first interest rate cut from November to September. Traders currently expect the Federal Reserve to cut interest rates by 25 basis points twice in 2024 (the pre-agricultural forecast was once). Liquidity margins are falling, interest rates on US bonds have also declined, and domestic and foreign capital inflows are expected to continue in the short term.
4. How much room is there for growth in this round?
Short-term market sentiment falls, focus on the dividend sector
The two rounds of rebound prior to this rise were a large-scale rebound under Davis' double hit and a weak recovery made up by foreign investment. Since November 2022, Hong Kong stocks have rebounded at a large level against the backdrop of simultaneous recovery in fundamentals and liquidity, with a cumulative increase of 41.3% from November 1, 2022 to January 31, 2023. In June 2023, after risks such as thunderstorms in the US banking industry were fully released, the liquidity of Hong Kong stocks improved. In particular, the technology sector favored by foreign investors recovered markedly. From June 1 to July 31, 2023, the Hang Seng Index had a cumulative increase of 10.2%, and the Hang Seng Technology Index had a cumulative increase of 25.3%, emerging from a weak recovery due to foreign capital recovery.
Continued capital inflows are compounded by a recovery in domestic fundamentals, and this round of growth is expected to continue. The current rise in Hong Kong stocks is mainly benefiting from improvements in capital. Domestic and foreign capital inflows are expected to continue in the short term, and southbound capital will provide further stable support. The April Politburo meeting first proposed “absorbing stock and optimizing growth” in real estate. Recently, various regions have also continued to optimize real estate policies, and fundamentals are expected to recover faster. The current round of gains is expected to continue further.
5. How will the style of Hong Kong stocks change in the future?
Currently, the Hong Kong stock market is showing a situation where Hong Kong capital, foreign investment, and domestic investment are trifecta. With policy support, the right to price southbound capital is expected to increase. In the past, investors in Hong Kong stocks were mainly local intermediaries in Hong Kong and international intermediaries, while the share of Chinese investors was relatively low; currently, the Hong Kong stock market presents a situation where Hong Kong, foreign and domestic investors stand on all sides. Based on the shares held by Hong Kong Stock Connect, Chinese institutions, local Hong Kong institutions and international institutions, which are the constituent stocks of the Hang Seng Composite Index, the current share of domestic capital (including Chinese institutions and Hong Kong Stock Connect) has reached 31.48%, which is basically the same as the share of foreign capital and Hong Kong capital.
Recently, favorable policies for cooperation with Hong Kong have continued to be introduced, and it is expected that the southbound pricing power will increase dramatically in the future. On April 19, the Securities Regulatory Commission issued the “5 Capital Market Cooperation Measures with Hong Kong”. The details include easing the scope of eligible products for stock ETFs under the Shanghai-Shenzhen-Hong Kong Stock Connect, supporting the integration of RMB stock trading counters into Hong Kong Stock Connect, optimizing mutual fund recognition arrangements, and supporting leading enterprises in the mainland industry to go public in Hong Kong. On May 9, Bloomberg reported that China is considering reducing the 20% income tax that mainland individual investors need to pay when investing in Hong Kong stocks through the Hong Kong Stock Connect to receive dividends to avoid repeated taxation between the two places. As favorable policies continue to be introduced, southbound capital is expected to continue to flow steadily in the future, while foreign capital is affected by international relations and overseas liquidity, and is highly volatile. The southbound pricing power is expected to increase dramatically in the future, replacing the style where foreign capital dominates Hong Kong stocks.
Judging from the allocation style of domestic and foreign capital, foreign investors prefer scarce assets such as Internet companies. Domestic capital allocations are more diverse, and there are more allocations to central state-owned enterprises. Foreign shareholding preferences are similar, mainly Internet companies. Among the top 5 foreign holdings, Tencent, Ali, Meituan, and JD are all Internet companies. Furthermore, AIA is also favored by foreign investors. Chinese-owned shareholding directions are more diverse, and central state-owned enterprises have more allocations, including large state-owned banks, “three barrels of oil,” telecom operators, and leading technology stocks.
6. What is the current configuration logic?
The main allocation for the next year will still be the dividend sector, and Hong Kong stocks are more cost-effective in the high-dividend sector. Since February of this year, high dividends have become the mainstream style. Hong Kong stocks have higher dividend ratios and lower valuations than A-shares, and are more cost-effective, which is the main reason for attracting the continuous inflow of capital to the south. In the context of the continuous inflow of southbound capital and increased pricing power, attention can be paid to southbound capital preferences and AH share premium opportunities. The AH share premium is due to differences in the valuation and pricing of the same company by investors in the two places. Currently, the median AH share price ratio in the entire market is 1.94 (the price of A shares divided by the corresponding H share price, HKD is converted to RMB, the other indicators are the same), the median AH share price difference is 5.41 yuan, and the median A-share premium rate is 94.44%. Due to the AH share premium, the dividend ratio of H shares is also significantly higher than that of A shares. The dividend rate difference for AH shares in the entire market (excluding companies that do not pay dividends) is 2.2%. Among them, the median dividend rate for A shares is 2.3%, and the median dividend rate for H shares is 4.9%, which is nearly double the difference.
In the dividend section, we can focus on central state-owned enterprises, enterprises with stable performance, and the ability to pay dividends continuously. After AH share companies were screened according to the conditions that the dividend rate of H shares was higher than 5% and that EPS and dividend rates had maintained positive growth in the past three years, a total of 19 companies met the above conditions. The vast majority of them were central state-owned enterprises.
The Science Network section can focus on companies that have shown recent economic improvements. Judging from the 2023 results, the performance of leading Technet stocks has improved markedly, and Meituan and Kuaishou have turned losses into profits. According to the news, the recent launch of the SU7 by Xiaomi attracted widespread attention in the market, while leading stocks continued to increase repurchases, showing confidence in growth. Since this year, Tencent Holdings has repurchased more than HK$20 billion and announced a repurchase plan of HK$100 billion; Meituan, Xiaomi Group, and Kuaishou have also made large repurchases. In May, the first quarter results of each company will be announced one after another, and the economy can be expected to improve.
Editor/jayden