Key Takeaways:
Mainland Chinese investors have poured nearly HKD 280 billion (USD 35.8 billion) into Hong Kong’s stock market this year, making the southbound Stock Connect program the largest single source of capital for the city’s equities and providing a crucial pillar of support as the market navigates global geopolitical uncertainty.
"The investment strategy of southbound capital has shifted from one-way accumulation to flexible position adjustments," Mak Ka Ka, Head of Financial Products Trading and Research at SinoPac Securities (Asia), told ET Net News Agency, noting that profit-taking occurs once upside is perceived to have peaked. Still, the underlying trend of strategic allocation remains firmly in place.
The buying has been substantial, with the cumulative net inflow via the Stock Connect pipeline reaching nearly HKD 280 billion as of May 12, according to data from Wind. While short-term profit-taking led to a net outflow of about HKD 2 billion on May 6, the broader trend has seen the Hang Seng Index (HSI) reclaim the 26,000 mark, closing at 26,394 for the week ending May 10. The index now appears to be finding support above the 26,250 level, which had previously acted as resistance for a month.
The sustained inflows are helping to stabilize a market facing a complex mix of signals, from a global rally in AI-related stocks that has largely bypassed the HSI to an upcoming summit between US President Trump and Chinese President Xi Jinping on May 14-15. The meeting, along with upcoming earnings from heavyweights like Tencent and Alibaba, is seen as the next major test for market sentiment.
While global markets have been caught in a frenzy over artificial intelligence hardware, southbound capital has shown a clear preference for Hong Kong’s traditional heavyweights. Over the past month, buying has been concentrated in the energy, finance, and communication services sectors.
This stands in contrast to the chase for AI stocks seen in the US, Japan, and Korea. Analysts note that Hong Kong lacks the large-cap, pure-play AI hardware manufacturers that are attracting global funds. "The representative AI stocks in Hong Kong are currently AI platform stocks such as Tencent and Alibaba, which have insufficient appeal to current funds," Mak said. Instead, mainland investors are using the Stock Connect to buy into high-dividend, lower-valuation state-owned enterprises and financial giants, a theme that has gained traction as the A-share premium over H-shares has narrowed to a seven-year low.
With the Trump-Xi meeting imminent, investors are approaching the event with caution. A Goldman Sachs analysis notes that market expectations for a major breakthrough are low, creating the potential for a tactical rally on any modestly positive news. The bank’s economists expect an incremental deal where China increases purchases of US goods in exchange for some easing of technology restrictions.
Historically, Chinese equities have performed well following such summits, gaining an average of 4% in the subsequent three months, according to the Goldman report. The bank sees a "compelling risk/reward profile for Chinese equity," highlighting that offshore Chinese equities, like those in Hong Kong, could outperform in the short run due to cheaper valuations and higher sensitivity to geopolitical news flow. Should risk appetite improve, the HSI’s next major resistance level is seen near 27,200.
This article is for informational purposes only and does not constitute investment advice.
