CICC | Public offering 1Q24 Hong Kong stock investment: new economy holdings fell to a new low since 2019

In the first quarter of 2024, the Hong Kong stock market first fell and then rose, after the index fell sharply below the 15,000 point mark in late January, with the policy force and the domestic economic data repaired, the Hong Kong stock and A-share markets rebounded around the Spring Festival holiday, basically repairing the structural market that showed a box shock trend after the previous decline. However, in stark contrast to the overall market volatility, southbound funds have maintained a steady inflow trend since the beginning of this year, especially since the Spring Festival holiday in February, there has been only one net outflow in 41 trading days. As an important participant in southbound funds, what is the position of mainland public funds in Hong Kong stocks and what changes have been made in the allocation of industries? We answer the above questions by combing through the positions of public funds in Hong Kong stocks in the first quarter.

The overall trend: the proportion of public offerings in southbound stocks has further declined, and the total scale of public offerings of Hong Kong stocks has also shrunk

The total scale of public funds that can invest in Hong Kong stocks has shrunk. Overall, as of the end of the first quarter of this year, there were 3,488 public funds (excluding QDII) in the mainland that could invest in Hong Kong stocks, with total assets of 2.2 trillion yuan, although the number of funds increased compared with the fourth quarter, the scale fell by 227.8 billion yuan, accounting for 29.0% and 13.3% of all 12,038 non-cargo funds and 16.7 trillion yuan. Among them, there were 1,916 active equity funds (with a total scale of 1.5 trillion yuan), and the overall scale also decreased by 91.6 billion yuan compared with the fourth quarter. In terms of issuance, the number and scale of new public funds that can be invested in Hong Kong stocks in the first quarter slowed down compared with the fourth quarter of last year, with an average of 39 new funds issued per month, with an increase of RMB 42.9 billion (compared with 45 and RMB 45.3 billion in the fourth quarter). Specifically, the issuance of active equity-biased funds also slowed down compared with the fourth quarter, with an average of 21 per month (26 in the fourth quarter) and an additional scale of 13.4 billion yuan (20.2 billion yuan in the fourth quarter).

The proportion of public offerings in the southbound sector has further declined, and there may be a slight active reduction in holdings. The above-mentioned 3,370 public funds held a market value of 305.5 billion yuan in the Hong Kong stock market, down 4.8% from 320.9 billion yuan in the fourth quarter. Considering that during this period, the Hang Seng Index and the MSCI China Index fell by 3.0% and 2.2% respectively, while the Hang Seng China Enterprises Index rose by 0.7%, indicating that public funds may have a slight active reduction in holdings. At present, Hong Kong stocks account for 19.0% of the total holdings, a slight increase of 0.4 percentage points from 18.6% in the fourth quarter. Looking further at the active stock-biased funds, the holdings of Hong Kong stocks in the first quarter were 220.1 billion yuan, a relatively low decline (-2.9%, 226.8 billion yuan in the fourth quarter), and the proportion of holdings rebounded from 16.6% in the fourth quarter to 17.2%. However, the proportion of public offerings in the overall southbound holdings of 2.3 trillion yuan fell by 2.7 percentage points to 13.6%, which also shows that the main force of the recent strong southbound inflows is not public offerings.

Industry allocation: The proportion of the new economy continued to decline, with energy, retail, catering, and raw materials increasing the most, while pharmaceuticals and biology, automobiles, and media and entertainment declined significantly

The share of new economy holdings continued to decline, with pharmaceuticals and biotechnology, automobiles and parts, and media and entertainment declining the most, while energy, consumer services, and raw materials increased more. The overall proportion of the new economy decreased from 67.8% in the fourth quarter to 62.8%, while the proportion of the old economy increased sharply by 5 percentage points to 37.2%. In terms of sub-sectors, energy, retail, food and beverage, raw materials, and utilities saw the largest increases, while biopharmaceuticals, automobiles and parts, media and entertainment, and technology hardware saw the largest declines. Across sectors, media & entertainment, energy, and consumer services have the highest weighting, while real estate, industrials, and consumer staples have lower weights. Energy, communication services and raw materials are now at historic highs compared to their historical levels, while consumer durables and apparel, real estate, raw materials and food and beverages are at historic lows.

At the individual stock level, the holdings of pharmaceutical, biotechnology and information technology decreased, and the number of heavy positions in energy and telecom operator funds increased. At the individual stock level, mainland public offerings continue to have heavy positions in leading companies such as Tencent, CNOOC, China Mobile and Meituan. Compared to the fourth quarter, Tongcheng Travel, AAC Technologies and Aluminum Corporation of China ranked the top three in terms of market capitalization, while WuXi Biologics, Tencent and Hong Kong Stock Exchange saw the largest decreases. At the same time, China Shenhua, CMOC and Juzi Biopharma replaced SMIC, WuXi Biologics and Xiaomi Group into the top 10 heavy stocks. Compared with the fourth quarter, the number of funds holding CNOOC, CMOC and China Mobile has increased significantly, but the number of funds holding WuXi Biologics, Xpeng Motors and SMIC has decreased significantly. In addition, the concentration of heavy stocks also changed, with the top 3 heavy stocks accounting for 35.6% of the market value of the top 100 heavy stocks, up 2.1 percentage points from the fourth quarter, while the market value of the top 10 heavy stocks in the top 100 heavy stocks decreased to 53.5% from 54.8% in the fourth quarter.

Prospects: A short-term rebound is expected under positive catalysis, but the sustainability still needs to be "symptomatic" policies

After the previous LRP downgrade and the policy and fundamental optimism expectations were fully factored in, the rapid rebound momentum of the market since February has weakened significantly in the past month. We gradually shifted to relative caution in mid-March and suggested a return to a structural "dumbbell" allocation strategy with a suggested return to a volatile pattern for investors. At present, we continue this judgment, mainly based on the following three considerations: 1) The domestic endogenous growth momentum is still unstable, such as inflation and some high-frequency indicators are still weak, and although exports are bright spots, there is also a situation of "exchanging price for volume". M1 is also sluggish with new RMB loans and social financing, indicating that credit demand and corporate earnings still need to be improved; 2) As the main lever to solve the current credit contraction in China, the progress of fiscal spending has been affected by factors such as the reserve and quality of local government projects; 3) The delay in the Fed's interest rate cut expectations will also reduce the room for short-term monetary policy easing, and further interest rate cuts may be necessary in the current context of high domestic real interest rates. Meanwhile. Strong overall GDP data may somewhat reduce the likelihood of more favorable policies in the near term.

However, in the past week, Hong Kong stocks, especially Hang Seng Technology and leading Internet companies, have rebounded sharply, which is particularly striking in the context of the still falling A-shares and the relatively weak US stocks, and the index level has recovered all the "lost ground" of the previous week's decline. In terms of capital, as of last week, EPFR active funds are still flowing out, and it is not possible to verify whether there is a statement that foreign capital has switched from overseas markets to Hong Kong stock technology in order to avoid short-term fluctuations. However, from a short-term technical point of view, after the sharp drop in the previous week, the proportion of short selling transactions in Hong Kong stocks has returned to a stage high, so it is not surprising that the market has rebounded rapidly brought by transactional funds, including the release of the "Five Capital Market Cooperation Measures for Hong Kong" [1] issued by the China Securities Regulatory Commission [1] and the upgrading of the Chinese market rating by some foreign institutions, but the continuous inflow of long-term funds still needs further support from fundamental repair. However, we also need to remind investors that the current overbought level of the market has risen to a level second only to the March 12 high, and the Hang Seng Technology Index and some individual stocks are rising, and the proportion of short selling transactions has increased, indicating that investors are still divided on the market. Overall, we believe a "weak balance" between short-term growth and policy expectations is likely to keep markets volatile as they await new catalysts, such as the mid-year Politburo meeting or the resumption of U.S. liquidity or rate cut trading after mid-Q2. Based on this, we reiterate our previous view that the market may maintain a box shock pattern in the short term, and the reflation trade represented by pro-cyclical may be cooled, and it is recommended to turn to defensive assets such as high dividends, overseas leaders, and policy-supported technology growth sectors.

Chart: List of the number and scale of mainland public and other public funds that can invest in Hong Kong stocks