Who is buying Hong Kong stocks, and what are they buying?

Since the mid-September when the Fed confirmed its easing policy, the Hong Kong stock market has set off a grand epic rally, with the Hang Seng Tech Index accumulating a 36.6% increase in just half a month. On October 2nd, the first trading day after the National Day holiday, with the absence of southbound funds, the Hong Kong stock market surged, with the Hang Seng Index closing up by 6.2% and the Hang Seng Tech Index up by 8.53%.

During the period when southbound funds were "absent," who entered the Hong Kong stock market? Which sectors are preferred by incremental funds? How much incremental funds may still enter in the future? Huafu Securities and Huatai Securities have provided analysis in their latest research reports.

Foreign capital is an important incremental fund for the current Hong Kong stock market rally

Huafu Securities stated that in September, international intermediaries' funds in the Hong Kong stock market, which had been flowing out continuously for several months, turned into net inflows again, becoming an important incremental fund in the market.

Since the outbreak of the pandemic in 2020, there has been a significant change in the structure of incremental funds in the Hong Kong stock market. On one hand, overseas funds represented by international intermediaries have been continuously flowing out of the Hong Kong stock market, while on the other hand, mainland funds represented by southbound funds have been continuously pouring into the Hong Kong stock market However, from the latest marginal changes, an interesting phenomenon is that since September, overseas funds in the Hong Kong stock market have started to turn into net inflows. Since the middle and late September, the net inflow scale of international intermediaries' funds has reached HKD 39.6 billion, exceeding the net inflow of HKD 20.5 billion from the southbound funds.

Huatai Securities also pointed out that the return of foreign capital in the configuration plate (especially passive index-type foreign institutions) has played an important role in the capital market.

First, according to EPFR, from September 19th to 25th, passive index-type foreign capital inflows into Chinese equity assets amounted to USD 1.8 billion, showing a significant increase compared to before (note that this data only covers the two trading days after the "924" policy combination);

Second, since late September, with Chinese assets rising, other emerging markets have experienced a volatile market, which may reflect a re-balance of foreign capital within emerging markets;

Third, in the past month, the proportion of short positions in Hong Kong stocks has significantly decreased, mainly due to the increase in long positions. As of September 30th, the marginal change in the number of outstanding shares on September 23rd was not significant.

Foreign Capital Prefers Consumption and Technology

Huafu Securities pointed out that the significant return of foreign capital in the Hong Kong stock market since the middle and late September is an important reason for the dominance of the Hang Seng Tech Index.

International intermediaries in the Hong Kong stock market prefer the optional consumer and information technology sectors, which are also important components of the Hang Seng Tech Index. From this perspective, we believe that the rapid return of international intermediary funds since the middle and late September is an important factor in the dominance of the Hang Seng Tech Index. As of September 30th, the proportion of international intermediary holdings in the optional consumer industry in the Hong Kong stock market is 30%, and information technology accounts for 25%, far higher than other industries. In the Hang Seng Tech Index, the weight of the information technology sector is 50%, and the optional consumer sector accounts for 49%, also much higher than the 19% and 35% in the Hang Seng China Enterprises Index. Therefore, we believe that the significant return of foreign capital in the Hong Kong stock market since the middle and late September is an important reason for the dominance of the Hang Seng Tech Index.

Two Major Sources of Future Incremental Funds

Huatai Securities estimates that the incremental funds in the Hong Kong stock market in the future may come from the replenishment effect of foreign capital and the closing effect of short positions:

First, the global replenishment effect of foreign capital; as of the end of the second quarter, the proportion of Chinese stocks in the equity portfolios of the top 20 global asset management institutions (including mutual funds/hedge funds/trusts, etc.) is 1.3%, underweight by 1.9 percentage points compared to the MSCI ACWI China benchmark weight. If the expectation improves, and foreign capital's allocation to China returns to the level of the first quarter (underweight by 1.7 percentage points), it may bring about a net inflow of approximately USD 17 billion from top asset management institutions If we return to the central level of 2018-2020 (with a low allocation of 0.5%), it may bring about a net inflow of approximately $100 billion.

Secondly, there is the effect of closing out existing short positions; although the proportion of short selling in the Hong Kong stock market has been at historically low levels since September, the total number of outstanding short positions in the market has not significantly decreased, and the force of closing out existing short positions has not been fully released.

Huafu Securities also believes that the impressive performance of Chinese assets represented by Hong Kong stocks in the recent period is the result of multiple factors working together. On one hand, various favorable domestic policies have been frequently introduced, greatly boosting market confidence. On the other hand, the overseas Federal Reserve's interest rate cut in September has marginally eased the global liquidity environment. In the early stages of the Federal Reserve's interest rate cuts, global equity markets often benefit from the generally good performance due to denominator logic. Therefore, overall, we believe that the current situation in the Hong Kong stock market is still in progress, and there is still room for further upside. Structurally, if the international intermediary funds continue to flow back into the Hong Kong stock market in the future, growth sectors represented by the Hang Seng Technology Index are expected to continue to perform well