The Hong Kong stock market continues its robust performance, with the Hang Seng Index achieving a four-year high last week. Hong Kong-focused theme funds have delivered exceptional returns, with the top performer gaining over 172% year-to-date.
Industry professionals indicate that the market may be exhibiting clear bull market characteristics. Capital inflows into Hong Kong stocks appear to be forming a sustained trend, driven by both mainland institutional investors moving south through Stock Connect and overseas USD funds returning to Chinese assets. Optimism centers on internet, new energy vehicles, AI, and innovative sectors.
**Multiple Factors Drive Hong Kong Stock Rally**
Last week, the Hong Kong market continued its volume-driven advance, supported by multiple favorable factors. With global capital pursuing Hong Kong assets, the Hang Seng Index has gained over 31% year-to-date, leading major global indices.
Hong Kong theme funds have demonstrated outstanding performance. Among actively managed equity funds, the Huijia Hong Kong Advantage Selection Fund A led with a 172.12% year-to-date gain. The BOC Hong Kong Stock Connect Healthcare Fund A achieved nearly 130% growth over the same period. Several other funds including Southern Hong Kong Healthcare Industry A, GF Shanghai-Hong Kong-Shenzhen Healthcare A, Qianhai Open Source Shanghai-Hong Kong-Shenzhen Enjoyable Life, Qianhai Open Source Shanghai-Hong Kong-Shenzhen Core Resources A, and Baoying Healthcare Shanghai-Hong Kong-Shenzhen A posted gains between 70% and 95%.
In the passive index fund category, the GF CSI Hong Kong Innovation Drug ETF achieved a 112.04% year-to-date gain. Multiple ETFs including Wanjia CSI Hong Kong Stock Connect Innovation Drug ETF, Huijia China Securities Hong Kong Stock Connect Innovation Drug ETF, Invesco Great Wall CSI Hong Kong Stock Connect Innovation Drug ETF, Yinhua China Securities Hong Kong Stock Connect Innovation Drug ETF, and Fuguo Hang Seng Hong Kong Stock Connect Healthcare ETF all became "doubling funds."
Fund manager Zhao Xiancheng from Bosera Fund's overseas investment department noted that Hong Kong stocks' rally reflects the resonance between fundamentals and capital flows, resulting from a bullish consensus on Chinese assets between domestic and foreign investors.
Fund manager Xu Tingquan from HSBC Jintrust Hong Kong Stock Connect Selection explained that this year's Hong Kong market uptrend stems from several factors: First, valuation and confidence recovery. Leading internet companies' cost-reduction and efficiency-enhancement efforts over the past two years have gradually shown results, with corporate earnings beginning to exceed expectations. The launch of DeepSeek's large language model garnered market recognition for domestic AI-related investment opportunities, boosting valuations in related software and hardware sectors and creating positive capital effects. Additionally, years of pharmaceutical R&D by innovative drug companies have begun bearing fruit, with overseas licensing cooperation reaching new highs in both value and volume in the first half of the year.
Second, overseas monetary policy shifts. Federal Reserve rate cut expectations emerged from Q3 2024, and despite factors like inflation and tariff implementation temporarily constraining the pace, the formal start of the rate-cutting cycle has reduced short-term depreciation pressure on non-USD currencies, improving capital conditions for emerging markets and Hong Kong stocks. Southbound capital has continued flowing in since the first half of this year, with trading proportion climbing to around 30%, enhancing Hong Kong stock liquidity and positively impacting valuations and trading.
Third, supportive policy reinforcement. Amid potential external shocks affecting exports, policy focus has shifted to domestic demand-related areas, with policy combinations and consumption subsidy measures launched since Q3 last year beginning to show effectiveness.
**Capital Inflows Expected to Continue** **Optimism for Internet, New Energy Vehicles, AI Sectors**
Fund managers remain optimistic about Hong Kong stocks' prospects.
Fund manager Ning Jun from Fuguo Shanghai-Hong Kong-Shenzhen Performance-Driven Mixed Fund indicated the market may exhibit clear bull market characteristics. Whether through mainland institutional investors moving south via Stock Connect or overseas USD funds returning to China, capital inflow trends into Hong Kong markets have formed and will continue.
Zhao Xiancheng expects export improvements following tariff implementation. With Hong Kong-listed companies upgrading earnings forecasts and many excellent A-share companies applying for H-share listings, Hong Kong stocks remain attractively valued amid earnings upgrades and liquidity improvements. He favors internet, new energy vehicles, AI, and innovation sectors.
Xu Tingquan noted that after recovery since Q3 last year, current Hong Kong stock valuations have returned to historical median levels without being overvalued. Internet sector concerns about food delivery subsidy wars have been reflected in interim reports, with future focus on AI's fundamental impact and application commercialization. Internet, technology, healthcare, and consumer sectors all offer performance potential.
While Hong Kong stock momentum continues rising, fund managers also highlight risks.
Xu Tingquan identified uncertainties including geopolitical risks, Federal Reserve monetary policy direction, changes in US tariff and restriction measures, and the intensity of macro supportive policies.
Zhao Xiancheng sees main risk factors as: First, whether Hong Kong-listed companies can sustain or continue upgrading earnings performance, as historical data shows Hong Kong stock gains cannot diverge from earnings for extended periods. Second, risks from US trade negotiations. Third, inability of US Treasury yields to decline. Wall Street currently expects consecutive Fed rate cuts, requiring observation of whether US corporate cost transfers lead to persistent inflation, potentially slowing rate cut pace and magnitude below expectations.