Hang Seng Tech Index pulls back over 25% from high, southbound funds add billions in positions. Can Hong Kong stocks see a turning point?

Hong Kong stocks have been under continuous pressure recently, with the Hang Seng Tech Index becoming the focus of investor attention. Since October last year, the index has fallen by 25.99%, ranking at the bottom among major market indices. In February alone, the Hang Seng Tech Index dropped 10.15%, while the Shanghai Composite Index rose during the same period. The STAR Market 50 Index declined by 1.42%, and the S&P 500 and Nasdaq indices fell by 0.9% and 3.4%, respectively.

Despite the bearish market sentiment, southbound funds have shown an opposite trend by increasing their positions. On March 2, the net buy of southbound funds reached HKD 16.2 billion, marking the second consecutive day with net purchases exceeding HKD 10 billion. Year-to-date, the total net purchase of southbound funds has exceeded HKD 170 billion. Data shows that 13 ETFs tracking the Hang Seng Tech Index have received a total net subscription of HKD 39.118 billion this year, and the daily trading volume in the Hong Kong stock market expanded to HKD 357.7 billion.

Regarding the drivers behind this round of adjustment, institutional analysis presents multiple perspectives. CICC pointed out that the credit cycle, industrial structure, and liquidity environment are the three core variables. Specifically, by 2026, China’s credit cycle may shift from recovery to fluctuation, limiting the space for broad-based indices; under the wave of AI technology, differentiation among tech companies is intensifying, creating structural market pressure; and expectations of tightening global liquidity, combined with the expansion of Hong Kong IPOs, have resonated, exacerbating capital outflows.

Valuation levels show significant divergence. Changcheng Fund’s Qu Shaojie believes that the current valuation of the Hang Seng Tech Index is at a historic low, offering a comparative advantage over US, Japanese, and Korean tech stocks. The decline is mainly due to concerns over the pace of AI strategy implementation, rather than deterioration in corporate fundamentals. As the global hardware tech cycle rises, the valuation attractiveness of Hong Kong’s tech sector is increasing.

Industry structural contradictions are also noteworthy. Nord Fund’s Xie Yi pointed out that cross-sector competition among internet giants has led to increased capital expenditure, but the results of new business expansion have yet to materialize, and this value erosion continues to suppress stock performance. Dachen Fund’s Ran Linghao emphasized that the commercialization of AI applications and the competition for traffic entry will become key tracks, and the hardware sub-sector may generate new investment opportunities.

There are differing views on the outlook for capital flows. CICC believes that improving the Hong Kong stock market’s capital environment by 2026 will be challenging, as ETF and trading funds are significantly influenced by market sentiment. Unless there is an unexpected rally, it will be difficult to replicate last year’s net inflow of HKD 1.4 trillion. However, the institution also pointed out that sectors unique to Hong Kong, such as technology and consumer stocks, still hold allocation value for southbound funds, especially the tech ecosystem dominated by internet and AI models, which complements the A-share market with a differentiated approach.