Hong Kong Stocks Soar; Foreign Capital Aggressively Adds Positions?

The significant surge in Hong Kong stocks reflects the entry of foreign capital and local Hong Kong funds due to fear of missing out,as no one wants to miss this grand feast.

On October 2nd,while the Hong Kong-Shanghai Stock Connect and A-shares were closed,Hong Kong stocks,trading alone,saw a broad market rally with trading volumes remaining at high levels.

By the close,the Hang Seng Index rose by 6.2%,the Hang Seng Technology Index by 8.53%,and the Hang Seng China Enterprises Index by 7.08%,with a total transaction volume of 43.4017 billion Hong Kong dollars.In terms of sectors,domestic real estate stocks soared collectively,with Ronshine China surging by 397%,Agile Group by over 160%,and Shimao Group by 153%; Chinese brokerage stocks exploded,with China Merchants Securities rising by over 81%,CITIC Securities by over 39%,and Shenwan Hongyuan Hong Kong by over 206%.

"Starting from the end of September,one can feel a significant improvement in the investment atmosphere.Almost everyone on the streets of Central is talking about the stock market surge,and there are fewer colleagues having lunch at noon,opting for more expensive takeout instead," said a trader named Xiao Chen,who works in Hong Kong,to Caijing magazine.

Another wealth manager from a foreign private bank in Central said,"It's been so busy,I haven't been this busy in a long time.I only had a four-minute lunch today because there are too many client inquiries to respond to,and my vacation had to be canceled."

Despite A-shares still being closed,funds have been allocated in advance through Hong Kong stock ETFs.

The Southern Science and Technology Innovation Board 50 ETF,listed on the Hong Kong Stock Exchange,saw its intraday increase exceed 230%.Southern East Assets had to issue a risk warning at noon,stating that the fund manager would like to remind sub-fund shareholders of the market trading risks,including but not limited to significant premiums in secondary market prices.Shareholders are advised to act cautiously when trading A-share ETFs,especially during the National Day holiday when the mainland securities market is closed.After the risk warning was issued,the increase in the Southern Science and Technology Innovation Board 50 narrowed,closing up by 28.79%,with a transaction volume of 168 million Hong Kong dollars and a turnover rate of 196.7%.

Today's significant rise in Hong Kong stocks is a continuation of the A-share market,and the Hong Kong stocks trading during the National Day holiday have also made investors more hopeful for the post-holiday A-share market.However,some Hong Kong stock analysts have warned that before the A-share market reopens after the holiday,Hong Kong stocks will continue to trade alone for several days,and it is necessary to continue observing whether this round of market performance can be sustained.

Who is entering the Hong Kong stock feast?"Although on vacation,I was just off the plane and was shocked by the historic market trend in China," Hong Hao,Chief Economist at Si Rui Group,told Caijing."The A-share market is closed for the National Day holiday,while the Hong Kong stock market continues to rise,showing Hong Kong market investors' anticipation for market recovery and favorable policies." Hong Hao reiterated that the Chinese market is the most significant contrarian value investment opportunity this year,and for many analysts and traders,this is a once-in-a-lifetime historic market trend.Many indicators on the current market are historic,such as the five-day increase and trading volume,both reaching historical highs.

"Today's Hong Kong stock market is no longer dominated by mainland capital flowing south,proving that major foreign capital that was previously underweight in Chinese stocks is quickly catching up on Chinese assets,with other funds such as local capital following suit," said Chen Guo,Chief Strategist at CITIC Construction Investment.Chen Guo previously stated in a teleconference that this round of the market trend is a rare one where all three factors of upward revision of profit expectations,decline in risk-free interest rates,and increase in risk appetite are present,so it is not a simple oversold rebound.In fact,the increase in the Hong Kong stock index can generally be considered to have established a bull market,and the A-share market under similar backgrounds and logic can also be considered to be in a bull market trend.

"The sharp rise in Hong Kong stocks perfectly reflects the characteristics of foreign capital and local Hong Kong funds entering the market one after another due to fear of missing out,as no one wants to miss this feast," said Yan Zhaojun,a strategist at Zhongtai International."Looking at the market,sectors or stocks that were previously undervalued,such as Hang Seng Tech Index,consumer discretionary,and real estate,have shown astonishing rebound strength,and index-weighted stocks have also risen across the board.The reason is the return flow of foreign capital that had significantly underweighted Hong Kong stocks,as well as the reversal of previous trades that were long on Japanese stocks,Indian stocks,and the seven sisters of US stocks.The situation is similar to the sharp rise in the yen in early August due to the reversal of yen carry trades,only this time it has come true in the Chinese stock market.In addition,the gamma squeeze in options has accelerated the rise of the market and individual stocks.Sellers of call options need to buy more underlying stocks to hedge risks,which further increases the rise of the market or individual stocks."

How long can the strong pull-up last?

"Based on discussions with investors,this round of the rise is expected to continue," a research report from Daiwa Securities stated.Although most investors believe that substantial policy initiatives are needed to rationalize a long-term market reversal,the bank believes the process may take several months and expects investors to act quickly first.Daiwa also believes that many global long-term investors are eager to reduce their underweight position in China,with internet stocks becoming one of the focuses.In addition,Shanghai,Shenzhen,and Guangzhou have significantly relaxed restrictions on home purchases for non-local residents,and it is believed that the effectiveness of this round of easing policies will be better than the previous ones.Due to the strong market sentiment,the short-term performance of the real estate industry is cautiously optimistic.

Haitong International issued a research report stating that the Chinese internet sector rebounded last week,with the Hang Seng Technology Index rising by more than 20% from September 23 to 27,and the CSI China Internet ETF rising by 25% during the same period.Looking back at the two rebounds in the internet industry over the past two years,it can be seen that the prices of most stocks in the industry have not yet returned to their post-pandemic highs.Haitong International advises investors to adopt a bottom-up stock selection method,focusing on the improvement of corporate valuations and fundamentals,and paying attention to sub-sectors such as e-commerce,entertainment,online travel agencies and hotels,education,and online advertising.

UBS Global Research stated that historically,October is one of the months when the Chinese stock market performs well,outperforming the monthly average performance by 1.5 percentage points.Due to improved market sentiment and lower positions,it is expected that the short-term momentum will continue until mid-October.In addition,after this round of sharp rises,the key factors to watch are the scale and type of fiscal measures.It is expected that a package of measures supporting consumption and local government financing will be the most popular with investors,and in the next few quarters,more stock market support policies starting from improving corporate governance may also be seen.

"The current extremely high slope of the violent pull-up in Hong Kong stocks is unsustainable,and the Hang Seng Index Volatility Index has also risen by 27.2% to a level higher than the past year.As the Hang Seng Index rises close to its high point at the beginning of January 2023,coupled with the fact that short-term valuation repair has been very sufficient,it is expected that the volatility of Hong Kong stocks will significantly increase,and there may also be pressure to take profits at high levels.If the market enters a period of consolidation and digestion,it is expected that second and third-tier industry leaders with a profit base will outperform,and recently underperforming high dividend stocks such as domestic banks,energy,and telecommunications may also become the target of capital inflow." Yan Zhaojun believes.