Soaring! Are foreign investors back?

Hong Kong stocks continued to open higher and rise today, with the Hang Seng Tech Index (HSTECH) being the strongest performer, surging more than 5% intraday and accumulating a 13.5% gain this week.

After four consecutive years of decline, Hong Kong stocks were ignored by many, but the five-day rally this week quickly caught the attention of numerous investors.

The entire financial circle is searching for the reason behind the sudden surge in Hong Kong stocks. In the view of Guo Erxia, the rebound in Hong Kong stocks is a normal phenomenon—they are severely undervalued. While the market is temporarily swayed by sentiment, the essence of investing—buying low and selling high—remains unchanged.

Currently, the Hang Seng Index (HSI) has fallen from 31,000 points in January 2021 to a low of 14,500 points in October 2022, effectively halving in value. If converted to the A-share market, this would be equivalent to dropping from 3,700 points in 2021 to 1,800 points. After four consecutive years of decline, those who wanted to sell have already done so, clearing out the market. In fact, since 2023, Hong Kong stocks have struggled to fall further, with many stocks offering dividend yields above 8%. Even growth stocks like Tencent Holdings (0700.HK), with its buybacks and dividends, offer a yield of 4.5%. Who would want to sell at such a time?

In the short term, the fundamentals of these Hong Kong-listed companies are unlikely to change significantly. The main driver is improved liquidity, with foreign capital being the primary force behind the buying.

Today, northbound capital recorded a net purchase of A-shares worth 22.45 billion yuan, setting the largest single-day net buying record since the launch of the Stock Connect mechanism in 2014. This surpassed the previous high of 21.7 billion yuan on May 25, 2021, reflecting foreign investors' positive attitude and enthusiasm for the Chinese market.

When foreign investors allocate to China, their first choice is Hong Kong stocks due to easier capital flows. It’s reasonable to assume they’ve bought a significant amount of Hong Kong stocks as well.

Another market view is that the recent sharp depreciation of the Japanese yen has led some foreign capital that previously "sold Hong Kong to buy Japan" to return. With no one selling and new buyers entering, the market surged quickly.

In the second half of last year, the biggest drag on Hong Kong stocks was the systemic outflow of foreign capital into Japan. Now, those who sold Japanese stocks after their rally are also facing losses due to the rapidly depreciating yen. If the yen continues to weaken, the gains from Japanese stocks won’t even cover the currency losses. Talk about a reversal of fortunes.

The yen has depreciated the most among major non-U.S. currencies, while the Chinese yuan is the most stable mainstream currency besides the U.S. dollar. Buying Chinese assets now offers a hedge—at least there’s no currency loss.

However, I’ve heard some sarcastic remarks, like, "Could it be that Japan actually wants the yen to depreciate?" Seriously? Last month, Japan raised interest rates to weaken the yen? Meanwhile, the U.S. keeps hiking rates, and the dollar strengthens. What kind of twisted logic is that?

At the end of the day, it’s just a lack of confidence. When the yuan depreciates, it’s "foreign capital fleeing, China is doomed." When the yen depreciates, it’s "good for exports, good for real estate." The double standards are real.

Maybe we should reflect this weekend on why Hong Kong stocks have rallied for five straight days?

Hold onto your positions—don’t be the one who endures all the losses but runs away just as the profits start rolling in.

$TENCENT(00700.HK) $Hang Seng TECH Index(STECH.HK) $MEITUAN(03690.HK)