Multiple Factors Attract Capital Inflows

Since the beginning of this year, southbound capital has become the main force driving Hong Kong stocks, with cumulative net inflows exceeding RMB 800 billion—surpassing the total for last year and hitting a record high.

According to Fullgoal Fund, the sustained influx of capital into Hong Kong stocks is driven by three key factors: First, after continuous adjustments from 2021 to 2023, Hong Kong stocks now offer compelling value. Second, the core theme of global assets this year is capital rebalancing, particularly a shift from dollar-denominated assets to non-dollar assets, with Hong Kong stocks poised to benefit first. Lastly, amid the dual forces of China’s asset revaluation and industrial transformation, sectors representing the new economy—such as AI, innovative pharmaceuticals, and new consumption—demonstrate greater resilience, and these niche areas are relatively scarce in Hong Kong’s market.

The preferences of southbound capital have shifted. Fullgoal Fund estimates that this year, southbound capital has aggressively bought into the pharmaceutical and biotech sector, with inflows up 87% compared to 2024. In terms of portfolio composition, the top five sectors held by southbound capital are banking, media, pharmaceuticals, non-bank financials, and electronics, accounting for 55% collectively.

Public funds are a significant component of southbound capital. Guotai Haitong Securities estimates that in Q2, active equity-focused funds increased their Hong Kong stock holdings by about RMB 30 billion, following a RMB 100 billion increase in Q1. Combined with roughly RMB 70 billion in passive inflows during the first half, total public fund inflows via Stock Connect reached nearly RMB 200 billion in H1. Full-year net inflows through Stock Connect are projected at RMB 300–450 billion.

"Since 2014, southbound capital has consistently flowed into Hong Kong’s market, with a notable acceleration this year," said Wang Xinchen, a fund manager at Harvest Fund. He believes Hong Kong stocks remain undervalued compared to major global markets, and the market’s prosperity is just beginning, with tech assets becoming increasingly attractive. After a significant rally, some thematic small- and mid-cap stocks in Hong Kong have seen valuations return to elevated levels, warranting close monitoring of their ability to deliver sustainable revenue and profits.

From the perspective of Yang Yang, Assistant General Manager of the International Business Department at Huabao Fund, earnings forecasts for Hong Kong stocks have been revised upward since October last year, reflecting market expectations for economic recovery and corporate profitability. On a one-year horizon, Hong Kong stocks are at a historically reasonable valuation level but remain relatively low globally.