When foreign capital is flowing out and southbound bargain hunting is happening, who are the "smart money" in Hong Kong stocks?
Southern capital tends to increase its allocation to growth and large financial sectors during periodic inflows, while foreign capital always prefers growth and diversified financial sectors with scarcity. The key point is that when the period of inflow from the south and outflow of foreign capital ends, the Hong Kong stock market often experiences a periodic rise.
Replaying the capital behavior and market performance during the period of capital deviation between the north and the south in history, the Hong Kong stock market often remained in a continuous downward period under various pressures.
However, looking specifically at the behavior of Hong Kong stock investors during the period when southbound funds flowed in and foreign capital flowed out, southbound funds showed a strong preference for growth sectors, especially in the information technology industry such as the Internet and games, innovative drugs and traditional Chinese medicine in the pharmaceutical industry, and retail in the optional consumer sector.
In addition, the financial sector has also been favored by southbound funds, but in recent years, diversified finance with stronger growth has gradually been favored by southbound funds over banks. Foreign capital has generally flowed out of all sectors.
Overall, the capital flow behavior during the period of capital deviation between the north and the south, whether it is a temporary inflow or outflow of southbound funds, shows a certain degree of portfolio adjustment and capital rotation effect. Foreign capital has always had a weaker preference for defensive and cyclical sectors, and during the inflow period, it only tends to allocate to growth sectors and large finance (mainly diversified finance).
Historically, after the period of continuous southbound inflows and foreign capital outflows, the Hong Kong stock market often ushered in a period of temporary rise. On average, the average duration of the temporary rise after six periods of capital deviation is about 57 days, and the average increase of the Hang Seng Index is about 15.5%.
Looking at it by industry, in the subsequent rising market, the growth sector has a higher average increase, with information technology, optional consumption, and healthcare rising by 29.5%, 19.8%, and 18.5%, respectively. The large finance sector also has a relatively high increase.
Considering that the previous southbound funds were more inclined to bottom-fishing in the growth and large finance sectors, during this period, southbound funds may be the real "smart money".
Since mid-February, it has been observed that the trend of southbound and foreign capital in the Hong Kong stock market has deviated again, and the trend of northbound capital outflow has also reappeared recently.
Excluding the impact of the Hong Kong stock index adjustment in early March, southbound funds have recently continued to increase their allocation to technology (semiconductors, technical hardware), pharmaceuticals (pharmaceuticals), and sectors with obvious characteristics such as telecommunications, construction, metals, and machinery.
Since February, geopolitical risks, overseas monetary tightening, and overseas banking system risks have been the main factors suppressing the performance of the Hong Kong stock market, and some risks have been priced in early. Looking ahead, combined with the trend of domestic fundamental recovery, the timing of the outbreak of peripheral risks is still early, the end of the Fed's interest rate hike cycle, and the approaching of the MSCI quarterly adjustment, it is expected that funds will re-increase their allocation to the Hong Kong stock market. Recommend focusing on two main areas: 1) Hard technology and medicine in the growth sector, including semiconductors, technical hardware, and innovative drugs; 2) Related sectors under the "China Special Estimate" theme, such as telecommunications, construction, and metals.
