Hong Kong stocks' "Middle East narrative" is a misinterpretation? Industrial Securities states that recent inflows are mostly short-term funds.

Caixin News (March 24, edited by Hu Jiarong) After the outbreak of conflict between the US and Iran, there has been a notable change in the flow of international intermediary funds (foreign capital) in the Hong Kong stock market. The previously sustained one-way outflow trend that had continued up to now has been reversed since early March, turning into a modest net inflow.

According to estimates, between March 2 and March 18, the cumulative net inflow was approximately HK$210 million. This figure indicates that market sentiment has shown marginal improvement under short-term geopolitical shocks.

Breakdown of fund characteristics: APAC flexible capital mainly, not Middle East sovereign long-term “money”

In response to the recent capital return to the market, the strategy team of Galaxy Securities’ Zhang Qiyao pointed out that the current offshore fund inflow into Hong Kong stocks has clear short-term characteristics. The main participants are flexible funds in the Asia-Pacific region (such as hedge funds), rather than the Middle East sovereign wealth funds and other long-term capital mentioned in market rumors. The report uses a multi-dimensional evidence chain to refute the simple narrative that “Middle East funds are making a big add-on to Hong Kong stocks as a safe-haven move.”

Key reasons include:

Mismatched investment philosophy: With recent market volatility being severe, foreign capital trading shows two-way characteristics, which does not align with the investment style of long-line Middle East capital.

Passive overseas funds flowing out: According to EPFR data, over the same period, the active funds representing overseas long-term capital recorded net outflows from the Hong Kong market.

Middle East domestic funds “returning” to the home market: After the outbreak of the conflict, foreign capital has been the main factor dragging down Middle East equity markets. Meanwhile, domestic institutional investors in Saudi Arabia, the UAE, and Qatar instead “bought more” equities in their own markets, suggesting that their domestic funds are showing signs of returning.

Cautious reallocation decisions by institutions: In the short-term uncertainty of the war situation, it is less likely that mature investment institutions would carry out large-scale and rapid global reallocations.

Interpreting cornerstone subscriptions for Hong Kong IPOs: Although the share of Middle East sovereign funds among cornerstone investors for Hong Kong IPOs has increased since this year, they are no longer present in recent IPO projects (after mid-January). The report cites expert views, arguing that Middle East capital’s participation is part of its long-term strategy of “looking east,” rather than a short-term safe-haven behavior.

Outlook: the “slow-variable” logic under geopolitical disruptions

Against the broader macro backdrop of geopolitical turmoil, it is true that, in the long run, the certainty of Chinese assets may attract more attention from Middle East capital. However, this process is defined as a “slow variable.” The pace and scale—how fast or slow it progresses and how large it becomes—largely depend on the final outcome of the US–Iran war and the subsequent evolution of the situation.

In summary, in the short term, the actual boost that geopolitical conflicts provide to capital flows into Hong Kong stocks is relatively limited. The current improvement in market liquidity mainly stems from the interplay of short-term flexible capital, while the substantive allocation of Middle East long-term capital will be a more long-term, gradual process constrained by multiple factors. Investors should take a rational view of capital flows and avoid over-interpreting the long-term logic behind short-term volatility.

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