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After experiencing a rebound from significant replenishment by overseas quantitative and hedge funds and funds from the south, the Hang Seng Index in Hong Kong has recently continued to adjust, falling by more than 1% on June 11th, approaching the 18,000 mark, closing at 18,176.34 points, after the index had once approached 20,000 points.

Overseas institutional sources told reporters that in May, global capital's net allocation to China increased at the beginning of the month, but recently, A-shares and American Depositary Receipts (ADRs, also known as Chinese concept stocks) have led a selling wave, partly offset by purchases of H-shares, but the pace of capital inflow into Hong Kong stocks has clearly slowed down. The sharp drop in expectations for interest rate cuts by the Federal Reserve has also impacted emerging markets as a whole. Emerging markets in Asia were net sold by global capital by $200 million last week.

Most investment bank analysts and fund managers interviewed by First Financial Daily generally believe that as the market develops, the drivers of returns often shift from market value expansion to profit improvement, making the realization of profits crucial for maintaining a bull market, and high dividend sectors remain favored. BlackRock's Hong Kong Stock Connect Vision Mixed Fund Manager, Yang Dong, previously told reporters that Hong Kong stocks are mainly dominated by institutional investors and are fundamentally driven, with not too many story-driven investment opportunities; investors need to have a deeper understanding of the fundamentals. The inflow and outflow of funds in Hong Kong stocks are quite volatile, and it is recommended to allocate with sufficient safety margins.

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After the surge, Hong Kong stocks continue to adjust

From the beginning of 2024 to now (as of June 5th), the Hang Seng Index has risen by 8.1%, with an average daily turnover of HKD 110.5 billion. If calculated from April, the index's maximum increase once exceeded 25%, entering a technical bull market.

However, since late May, Hong Kong stocks have entered a state of fluctuation and consolidation. Zhao Wenli, Chief Hong Kong Stock Strategist at CCB International, previously told reporters that after the surge, Hong Kong stocks are significantly overbought in the short term, with technical adjustment pressure. Looking at the historical bottom valuation repair patterns, the valuation repair around 20,000 points is basically in place, but the bear-bull transition is still in its early stages, and this round of the upward trend has not ended. It is expected that the overall adjustment space is limited, with good support around 18,000 to 18,500 points, and further upward space will depend on further policy benefits and performance recovery in the third quarter.

StoneX Senior Strategist David Scutt told reporters that in late May, traders bought heavily when the Hang Seng Index fell near 18,000 points, and the index once soared towards the resistance level of 18,500, which means that a new trend may be about to begin. However, the index then turned downward again, so it is still necessary to wait for further signals to confirm whether the uptrend can continue.

"If it seems to break through and close above 18,500, it may continue to rise, with 18,960 being the initial trading target, followed by the May high of 19,772. If it fails to recover 18,500, then bears may continue to wait for opportunities, with the target of falling back to 18,000. This would put the potential trend change in a stalemate, indicating that selling on the rise remains the preferred strategy for the future," said Scutt.

Relatively speaking, Hong Kong stocks, which are more affected by overseas capital and have poorer liquidity, have far more rebound elasticity than A-shares in this wave, and recently Hong Kong stocks have fallen in sync with A-shares. As of the close on June 11th, the Shanghai Composite Index fell by 0.76% to 3,028.05 points, approaching the 3,000 point mark again.

BlackRock believes that this round of Hong Kong stock market is a rational return based on overly pessimistic expectations in the previous period, forming a sequential transmission from the fundamentals to the capital side, and then to the sentiment side, with the most fundamental driving factor being the change in expectations of fundamentals. In the past two months, the introduction of a series of expansionary policies in China and the relatively stable performance of listed companies' Q1 2024 earnings reports, combined with relatively flat economic data from major overseas economies, have driven market expectations for China's economy to shift in a positive direction. Against this backdrop, global capital has undergone a rebalance of allocation to Chinese assets, with funds flowing back to Hong Kong stocks, coupled with factors such as short-covering, which has driven the market to rise rapidly.However, most institutions also believe that the effectiveness of the current real estate stimulus policies remains to be seen, and the current demographic trends and the relatively weak purchasing power of residents may form resistance to the policy's stimulating effect.

The pace of capital inflow into Asian markets slows down

Hedge funds, quantitative funds, and southbound capital are the main buyers in this round of rebound in Hong Kong stocks. Southbound capital has been showing a net inflow every trading day since May 16th, with a significant inflow of nearly 10 billion yuan on June 11th, but the inflow of overseas capital has clearly slowed down.

According to Goldman Sachs' prime brokerage data (mainly tracking the capital flows of hedge fund clients), Chinese stocks showed a net sell-off in May, with four out of the previous five months being net purchases. A-shares and US-listed Chinese concept stocks led the selling wave, partly offset by purchases of H-shares, but the buying momentum has clearly decreased; Japanese stocks showed a net purchase for the first time in nearly three months, with the net allocation increasing to 5.1% (the highest level in three years); the Indian market was affected by last week's election results, with Prime Minister Modi's BJP not obtaining a majority in the lower house for the first time. The trading volume of Indian stocks reached a historical high ($32 billion on June 4th). On June 4th, foreign investors net sold $1.5 billion, setting a historical single-day record for the largest sale.

In the past week, emerging market Asia was net sold $200 million last week. A-shares and South Korea respectively net purchased $700 million and $600 million; India saw a net outflow of $1.2 billion due to the election results.

The entire emerging market has been under pressure of capital outflow recently, with the sharp drop in expectations of US interest rate cuts being the main reason. The latest May US non-farm employment increased by 272,000 people, 92,000 more than expected, with strong employment growth across all industries, and wage growth exceeded the expected sequential growth of 0.2%, soaring to 0.4%, intensifying inflation concerns. The market's pricing for interest rate cuts within the year is only about 25 basis points, which is equivalent to one interest rate cut.

High dividend and internet sectors are still optimistic

Despite the pullback, the current outlook on Hong Kong stocks is not pessimistic. Institutions are still optimistic about high dividend and internet sectors.

Yang Dong told reporters that currently, the valuation of Hong Kong stocks is relatively low compared to other markets and their own historical valuations, and the pricing of many high-quality assets still has a safety margin. At the same time, the government has introduced a series of policies to support the economy, and the economic fundamentals will further affect the profits of listed companies. Currently, many Hong Kong-listed companies do not have much pressure to continue revising their performance downward, and investing in Hong Kong stocks still has value.

BlackRock believes that the advantage of Hong Kong stocks still lies in their differentiated functions. For example, compared to US stocks and Japanese stocks, in addition to valuation, the allocation advantage of Hong Kong stocks also lies in the unique advantages of China's economy compared to other economies. Currently, China has many excellent companies that are competitive in the global industrial chain. In addition, China's population base and the depth and breadth of Chinese consumption also have irreplaceable advantages in the global economy.In terms of sectors, Fidelity Funds recently mentioned that they will continue to favor relatively stable high-dividend sectors, including energy, consumer goods, finance, telecommunications, utilities, banking, and companies in Hong Kong stocks whose main business is distributed overseas. As the economic growth rate enters a medium-speed stable period, the low-interest-rate environment is expected to continue, and with the continuous support of policy orientation, it is anticipated that more listed companies will be willing to increase dividends, enhancing the relative attractiveness of dividend yields.

At the same time, companies with a global layout are also more favored. A QFII investment manager based in Singapore told reporters that one of the reasons why the overall ROE of U.S. stocks can maintain a high position of 8% and the stock market continues to climb is that many American companies are globally laid out, which helps them smooth out performance fluctuations. "China now also has many strong companies expanding overseas. When domestic consumer demand is relatively weak, companies going abroad can benefit from overseas dividends. For example, there are relevant examples in commercial real estate, machinery and equipment, home appliances, consumer goods, e-commerce, etc."

Institutions also continue to be optimistic about the internet. The rebound of this wave of Hong Kong stocks is led by internet companies because the leading enterprises in this sector continue to increase buybacks and dividends, and their performance recovery is ahead of other sectors. The aforementioned investment manager also mentioned to the reporter, "The trend of consumers spending online and looking for cost-effective products or services is still ongoing. Some internet giants also focus on shareholder returns and are favored by investors."

Yang Dong said that at the beginning of the year, considering the overall market environment, the portfolio adopted a relatively defensive approach, mainly allocated in the high-dividend field, including telecommunications services, energy, raw materials, etc. Later, as the government's attitude towards supporting the economy gradually became clear, the pressure on the performance revision of listed companies was somewhat released, so it gradually shifted to pro-cyclical sectors such as consumer goods, the internet, and industry. In the next phase of layout, the industry configuration focuses on balance, and continues to dig from the bottom up for good companies with a valuation safety margin.