Institutional analysts are closely examining the recent correction in the Hong Kong stock market, attributing the downturn to several factors, including credit cycles, industrial directions, and capital flows. Notably, the Hang Seng Tech Index has been a significant contributor to the decline, falling 2.89% in a single day, and has seen a cumulative drop of 25.99% since its peak in October. This situation has prompted a flurry of humor within the investment community, jokingly questioning the reliability of investments in the tech index and suggesting that certain stocks are drawing considerable ire.
Despite the downturn, southbound funds from mainland China have shown robust activity, with a net inflow exceeding 16.2 billion Hong Kong dollars on two consecutive trading days. This inflow has sparked speculation about a potential reversal for Hong Kong stocks, as year-to-date figures indicate these funds have net purchased over 170 billion Hong Kong dollars.
In February alone, the Hang Seng Tech Index performed poorly, with a cumulative decline of 10.15%, marking it at the bottom among major indexes. Comparatively, the Hang Seng Index fell 2.76%, while the STAR 50 Index and the Shanghai Composite Index fared slightly better. This trend raises questions about the underlying reasons for the index’s struggles, correlating them to various elements within the broader economic environment.
According to analysts from CICC, a comprehensive analysis of the current correction reveals three main areas of concern. Firstly, the credit cycle is pivotal in influencing the overall index performance; expectations suggest a recovery by 2025, but limited upside for broader indices remains probable. Secondly, the current industrial direction creates a challenging momentum structure, particularly for the Hang Seng Tech Index, which is less favored amid the prevailing AI narrative. Finally, liquidity conditions, especially due to macroeconomic uncertainties, have introduced additional volatility, impacting the performance of longer-duration assets such as those categorized under Hang Seng Tech.
Despite the gloomy outlook, the recent influx of southbound funds could signal positive sentiment for the Hong Kong market. With trading volume on March 2 reaching 357.7 billion Hong Kong dollars, an increase month-on-month, analysts believe there might be hope for a rebound in the Hang Seng Index. Qu Shaojie, from Great Wall Fund, highlighted that the recent decline predominantly arises from market apprehensions regarding AI strategy implementation rather than deteriorating fundamentals. He insists that the valuation of the Hang Seng Technology Index is historically low, making it an attractive alternative when compared to other markets, such as the U.S., Japan, and South Korea.
On the flip side, concerns remain regarding competitive pressures among major domestic internet firms, which comprise substantial portions of the Hang Seng Technology Index. Xie Li from Nuode Fund warned that unless unregulated competition ceases, the downward trend could persist. He noted that as core businesses reach maturity, these companies have pursued aggressive cross-sector expansions, which may be perceived to erode their intrinsic value.
Looking ahead, CICC predicts that the capital environment for Hong Kong stocks will be challenging, with the potential to underperform relative to the A-share market. Analysts suggest that a high sensitivity to fluctuations in market sentiment could hinder significant capital inflows unless performance exceeds basic expectations.
Nevertheless, unique sectors within the Hong Kong market still present investment opportunities. Among these, the technology sector, particularly focused on internet and AI models, stands out. As subsidies in the delivery sector diminish by 2026, other tech companies are expected to show organic growth, suggesting that earnings recovery will be the primary investment theme. As businesses navigate the critical integration of self-developed AI ecosystems to meet user demands, they might provide the momentum needed for recovery within the Hang Seng Tech Index.
