With the slowdown in foreign capital outflows and the acceleration of share buybacks, how should Hong Kong stocks be allocated?

Global Capital Flows: Net inflows into US, India, and Japan stock markets, net outflows from Mainland China and European stock markets.

As of September 20th, the US, India, and Japan stock markets saw net inflows of $6.4 billion, $1.3 billion, and $1.3 billion respectively, while the Hong Kong stock market saw net inflows of $200 million. However, the Mainland China market experienced net outflows of $1.68 billion.

Nevertheless, with the slowdown in foreign capital outflows and the acceleration of Hong Kong stock buybacks, the Hong Kong stock market is expected to stabilize.

Slowing down of foreign capital outflows from the Chinese market

According to EPFR, as of September 20th, there was a net outflow of $1.68 billion from the Mainland China market in September, with active funds experiencing a net outflow of $2.28 billion and passive funds experiencing a net inflow of $610 million. It is worth noting that passive funds switched from net outflows to net inflows in the Chinese market last week, recording a weekly net inflow of $460 million.

The proportion of foreign investment in Chinese stocks in September may still be relatively low, but there is limited room for further outflows. According to EPFR, as of the end of August, the proportion of global active funds invested in Chinese stocks was 1.7% (July: 1.9%), still lower than the five-year average of 2.2%.

Based on the fund flows from September to the present, it is expected that the proportion of foreign investment in Chinese stocks this month may still be relatively low, but there is relatively limited room for further outflows. It is recommended to continue to focus on structural opportunities for industries that are returning to standard allocation from low allocation.

Expectation of improvement in liquidity

After the mid-term earnings season, it is expected that there will be limited room for further downward revisions of profit expectations, and the fundamentals of companies are expected to gradually improve in the fourth quarter.

Recently, the acceleration of stock buybacks in the Hong Kong market is also conducive to the improvement of liquidity.

As of September 22, 2023, 164 Hong Kong stocks have conducted buybacks this year, with a total amount of approximately HKD 78.2 billion, higher than the total amount of buybacks in the first three quarters of last year, which was approximately HKD 65.2 billion.

By analyzing the buyback situation of Hong Kong stocks over the past decade, it is found that the buyback wave often occurs when the Hang Seng Index is at a low level, and within one year after the end of the buyback wave, the Hang Seng Index has recorded positive returns.

We expect that defensive value stocks are likely to continue to attract attention from southbound funds, while foreign capital inflows may prioritize adding positions in leading companies with stable fundamentals and reasonable valuations.