Hong Kong Stocks' Value Attracts $10B in ETF Investments
The Hong Kong stock market has recently experienced a notable surge followed by a period of volatility, presenting investors with an opportunity to capitalize on fluctuating prices. As of July 24, statistics reveal that southbound funds have seen a net inflow of 412.57 billion HKD up to that date in 2023, surpassing the annual net purchases of 2022 and 2023.
Since the market correction that began on May 20, several Exchange Traded Funds (ETFs) related to Hong Kong stocks have garnered attention from investors looking to buy at lower prices. During this period, nearly 10 billion HKD flowed into various Hong Kong ETFs. This increase in financial interest is evident in the operations of fund managers, as many have actively allocated funds towards Hong Kong stocks during Q2, enhancing their positions in these assets.
Beginning in Q2, the Hong Kong stock market underwent a robust rally, but soon entered a phase of correction. Data from Wind as of July 24 indicates that both the Hang Seng Index and the Hang Seng Tech Index have fallen by approximately 11.47% and 15.11% respectively since May 20. Consequently, the Hang Seng Index's year-to-date gain diminished to 1.55%, while the Hang Seng Tech Index suffered a total decline of 7.25%.
Amidst this downward trend, a curious phenomenon has emerged: various funds are increasingly taking the opportunity to buy on the dips. Notably, southbound funds have continued to acquire assets aggressively, with only three trading days registering net outflows during the nearly 46 trading days since May 20. By July 24, southbound funds had a net inflow of over 41.1 billion HKD for the month, breaking records with an impressive total of 87.65 billion HKD during June.
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In total, the net inflow of southbound funds this year has already reached 412.57 billion HKD, exceeding previous annual totals of 318.84 billion HKD in 2023 and 386.28 billion HKD in 2022. Specifically, the northbound stock access program of the Shanghai and Shenzhen stock exchanges contributed 256.34 billion HKD and 156.24 billion HKD respectively.
Furthermore, a discernible trend is emerging within the ETF market, where funds appear to be capitalizing on discounted prices. As of July 23, data indicates that out of 98 Hong Kong stock ETFs during this time period, the average decline recorded since May 20 has been 9.69%, which corresponds to a net inflow of approximately 9.54 billion HKD.
The most sought-after ETFs appear to be the FTFT-Zhang Zhi Hong Kong Internet ETF and the ICBC-Craigview High Dividend Selection ETF. Despite experiencing declines of 15.33% and 10.83%, these ETFs have attracted net inflows of 1.972 billion HKD and 1.310 billion HKD during the same time frame. Additional funds such as the Huaxia Hang Seng ETF and the E Fund Hang Seng Tech ETF also surpassed 100 million HKD in inflow.
In terms of performance, assets with high dividend yields continue to attract investors, and several funds have seen an increase in share count despite market conditions. For instance, the GF Fund 中证国新 and the Southern Fund 中证国新 entities have recorded share increases north of 1 billion.
The most recently released quarterly reports also highlight a significant preference for Hong Kong stocks among top fund managers. Recent data indicates that at the end of Q2, mutual fund institutions have heavily invested in 313 Hong Kong stocks, with a total market value exceeding 237.7 billion HKD, increasing by approximately 38.81 billion HKD.
Certain sectors seem to be gaining traction among mutual funds, which include media, oil and petrochemicals, and public services, with total holdings valued at 54.05 billion HKD, 27.43 billion HKD, and 20.04 billion HKD respectively. In terms of stock adjustments, the banking sector stands out as the most significant area where mutual funds have increased their holdings, alongside the real estate, public utilities, telecommunications, and environmental sectors, each surpassing an additional 200 million shares.
The increasing portfolio allocations to Hong Kong stocks seem to be directly correlated with perceived value propositions. Compared to the previous quarter, many funds have significantly expanded their holdings in Hong Kong stocks. Data shows that in a recent survey of 1,841 investment funds focusing on Hong Kong, 1,411 of these funds have raised their allocations, accounting for 76.64% of the total.
For example, the Qianhai Kaiyuan沪港深景气 industry fund has seen an increase in Hong Kong stock exposure by 78.94 percentage points. Other funds have also marked increases of more than a third of their holdings in Hong Kong stocks, such as the Qianhai Kaiyuan沪港深隆鑫A and Penghua沪深港互联网 products.
Star fund managers have not shied away from increasing their “Hong Kong exposure” either. Renowned fund manager Fu Pengbo remarked that while they slightly decreased allocations to equity assets, the overall contribution of Hong Kong stocks to performance has been notably positive. Zhang Kun, another top fund manager, has also consistently raised his allocation to Hong Kong stocks, boosting his portfolio in the E Fund优质企业 three-year holding from 38.98% by the end of last year to 46.71%.
According to data from Guosen Securities, the median holdings of Hong Kong stocks in both equity and mixed-asset funds have shown significant growth, now at 16.24% and 13.23% respectively compared to the previous quarter. Currently, there are 201 funds focused on pure equity allocations and 1360 funds adopting a mixed approach towards equities, indicating 52.56% of these funds have invested in Hong Kong stocks.
Insights gleaned from the Q2 reports underline “value for money” as a pivotal reason behind the managers’ amplified focus on Hong Kong stocks. Many managers are of the belief that the considerable markdown seen in Hong Kong stocks over past years has made their valuations relatively attractive, with higher dividend yields making them more appealing in comparison to their A-share counterparts.
Fund manager Zhang Jun from Qianhai Kaiyuan believes that the Hang Seng Index remains undervalued at its current levels, indicating the general bearish market sentiment lacks comparative value at this stage.
Recently outgoing star fund manager Qiu Dongrong has also examined the present valuation levels within the Hong Kong market, stressing that they sit comfortably at around the historical 20% percentile, reflecting a significant value proposition for investors — especially considering that certain companies within the sector are intrinsically rare and present as some of the most dynamic and innovative assets in the Chinese economy.
"Hong Kong equities demonstrate systemic undervaluation, and equity assets inherently promise a high return on investment, offering a strategic opportunity for active allocation," Qiu remarked.
Manager Huang Liang from Southern China’s Emerging Economies Fund notes that while foreign capital outflows have historically impacted the downturn of the Hong Kong market over the past three years, robust buybacks and dividends signal a resilient position against these outflows, acting as a fulcrum for pivotal stock reversals.
He asserts that the surge in shareholder returns from growth stocks in the current year, whether through dividends or buybacks, further supports the proposition of these growth stocks exhibiting tremendous value attributes. These stocks not only exhibit high valuation and returns but also demonstrate stronger growth potential, lower asset intensity, healthier balance sheets, and similar rarefied market structures, leading them to progressively enhance the allure of emergent "value stocks".