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

Since the Federal Reserve decided to ease in mid-September, Hong Kong stocks have set off a magnificent and epic market, and the Hang Seng Technology Index has risen by 36.6% in just half a month. On October 2, the first trading day after the National Day, in the absence of southbound funds, Hong Kong stocks rose like a rainbow, with the Hang Seng Index closing up 6.2% and the Hang Seng Technology Index up 8.53%.

During the "absence" of southbound funds, who is entering the Hong Kong stock market? What sectors do incremental funds prefer? How much more incremental funding is likely to enter the market in the future? Huafu Securities and Huatai Securities made an analysis in the latest research report.

Foreign capital is an important incremental fund for the rise of Hong Kong stocks in this round

Huafu Securities said that in September, the international intermediary funds in the Hong Kong stock market turned into a net inflow again after several months of continuous outflows, becoming an important incremental capital in the market.

Since the epidemic in 2020, the incremental capital structure of the Hong Kong stock market has changed significantly, with overseas funds represented by international intermediaries continuing to flow out of the Hong Kong stock market on the one hand, and mainland funds represented by southbound funds continuing to pour into the Hong Kong stock market on the other hand. However, judging from the latest marginal changes, a more interesting phenomenon is that since September, overseas funds in the Hong Kong stock market have begun to turn into net inflows, and since mid-to-late September, the net inflow of funds from international intermediaries has reached HK $39.6 billion, exceeding the net inflow of southbound funds of HK $20.5 billion.

Huatai Securities also pointed out that the return of foreign capital allocation (especially passive index foreign institutions) has played an important role in the capital side.

First, according to the EPFR, from September 19 to 25, the net inflow of passive index foreign capital into China's equity assets was US$1.8 billion, a significant increase from the previous year (note that this data only covers the two trading days after the "924" policy combination);

Second, since late September, as China's assets have risen, other emerging markets have been volatile, which may reflect the re-balance of foreign investment in emerging markets.

Third, the proportion of short trading in Hong Kong stocks has dropped significantly in the past month, but it is mainly due to the increase in the amount of long transactions, and the number of outstanding shares on September 30 has not changed much from the margin on the 23rd.

Foreign investors prefer consumption and technology

Huafu Securities pointed out that the sharp return of foreign capital in the Hong Kong stock market since mid-to-late September is an important reason for the dominance of Hang Seng Technology.

From this perspective, we believe that the rapid return of international intermediary funds since mid-to-late September is an important factor in the superiority of the Hang Seng TECH Index. As of September 30, international intermediaries in the Hong Kong stock market accounted for 30% of the optional consumer goods and 25% of the information technology, much higher than other industries. The information technology sector accounts for 50% of the Hang Seng Technology Index, and the optional consumption accounts for 49%, which is also much higher than the 19% and 35% of the Hang Seng China Enterprises Index. Therefore, we believe that the sharp return of foreign capital in the Hong Kong stock market since mid-to-late September is an important reason for Hang Seng Technology's advantage.

Two major sources of incremental funding in the future

Huatai Securities estimates that the incremental funds of Hong Kong stocks in the future may come from the covering effect of foreign capital and the liquidation effect of short positions:

First, the global foreign investment replenishment effect; As of the end of the second quarter, Chinese stocks accounted for 1.3% of the equity portfolios of the world's top 20 asset management institutions (including mutual funds/hedge funds/trusts, etc.), which was higher than that of MSCI ACWI China benchmark weight is underweight by 1.9 pct, and if the expected improvement is expected, foreign investment allocation to China will return to the level of the first quarter (underweight 1.7 pct), which may bring about US$17 billion of net inflows to top asset managers, and if it returns to the 2018-2020 pivot level (underweight 0.5pct), it may bring about US$100 billion of net inflows.

second, the effect of liquidation of stock shorts; Although the proportion of short trading in Hong Kong stocks has been at a historically low level since September, the number of open short selling shares in the whole market has not dropped significantly, and the power of stock short liquidation has not yet been fully released.

Huafu Securities also believes that the recent outstanding performance of Chinese assets represented by Hong Kong stocks is the result of multiple factors, on the one hand, various favorable domestic policies have been frequently introduced, which has greatly boosted market confidence; On the other hand, the overseas Fed cut interest rates in September, and the global liquidity environment tends to be loose at the margin, while the global equity market often benefits from the logic of the denominator in the early stage of the Fed's interest rate cuts. Therefore, on the whole, we believe that the current Hong Kong stock market is still on the way, and there is still room for growth in the future. Structurally, if the international intermediary funds in the Hong Kong stock market continue to return in the future, the growth sector represented by Hang Seng Technology is expected to continue to dominate.

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