The Hong Kong stock market is witnessing a transformative wave fueled by a significant influx of capital from public mutual funds, particularly concentrated on the so-called "southbound" investmentsThis trend is not just reshaping the dynamics of the market but is also redefining the pricing power associated with itAs we approach the end of the fourth quarter in 2024, the market capitalization of Hong Kong stocks held in large quantities by public mutual funds has reached unprecedented levelsThis burgeoning interest has led to record-high allocations of Hong Kong equities within the portfolios of these funds, highlighting a broader realignment in investment strategies.

Performance indicators indicate a robust post-holiday recovery for Hong Kong stocksAs of February 18, 2025, the Hang Seng Index surged by 13.61%, while the Hang Seng Tech Index experienced an impressive increase of 19.38% since February 3. These numbers place Hong Kong at the forefront of major global stock indices, underscoring the velocity of its market recoveryParticularly notable is the Hang Seng Tech Index, which recorded its highest closing price in the last three years on February 18, a clear sign of confidence returning to the tech sector.

According to Guotai Junan Securities, the reconstruction of pricing dynamics is a principal driver behind these developmentsData reveals a staggering net inflow of southbound capital amounting to HKD 773.1 billion in 2024, with HKD 136 billion flowing in during January alone—marking the highest single-month record in four yearsThe momentum has continued into February, with a net inflow of HKD 24.2 billion in just the first two weeks.

Public mutual funds, as a critical element of these southbound capital flows, are enhancing their investment focus significantly

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Analysis from Dongfang Caifu's Choice dataset exposes that by the end of the fourth quarter of 2024, the total market value of Hong Kong stocks heavily held by mutual funds reached an astonishing HKD 468.7 billion, establishing a historical record, with a 1.03% quarter-over-quarter growth and a striking 38.12% increase year-over-yearThis growth trajectory significantly outperformed both the Hang Seng Index and the Hang Seng Tech Index during the same period, which faced declines.

Digging deeper into asset allocation, mutual funds are increasingly anchoring their investments in high-technology sectors such as semiconductors and information technology equipment, as designated by the Hong Kong Stock Exchange’s secondary industry classificationsSimultaneously, they retain substantial allocations to high-dividend sectors like banking and coal, which continue to attract investor interest.

Despite this optimistic outlook shared broadly among institutional investors, including the public mutual funds and brokerages, the market faces inevitable fluctuations due to sovereign geopolitical tensions and the USD exchange rate dynamicsThe investment community remains cautiously vigilant, prepared to navigate the inherent volatility stemming from these external factors.

In particular, an analysis reveals that by the end of the fourth quarter of 2024, public mutual funds held a record total of HKD 3.22 trillion in stock assets, with Hong Kong stocks accounting for 14.57% of that total, marking a significant increase of 1.02 percentage points from the previous quarter and 3.07 percentage points year-on-yearThis is in stark contrast to previous years, where the proportions were 8.27%, 7.82%, 11.63%, and 11.50% in respectively corresponding periods from 2020 to 2023.

According to various reports issued by brokerages such as Guotai Junan, Guosen Securities, and Kaiyuan Securities, the valuation advantage of Hong Kong stocks significantly contributes to this influx of funds

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The projected price-to-earnings ratio (P/E) for the Hang Seng Index is a mere 9.18 times, situating it in the 24.18 percentile just under the past decade—contributing to its appeal as a high-return investment avenue when juxtaposed against other global markets that currently show elevated valuations.

Policy support complements the market's ascent, with tangible commitments from the government to promote capital market stability and encourage inflow of mid-term funds effectivelyThe commitment to maintaining a robust market infrastructure resonates through the investor community, amplifying confidence in the market’s potential for growth.

In addition, a telling piece of data shows that during 2024, 307 Hong Kong-listed companies undertook share repurchases, accumulating a total of HKD 370.1 billionThe charts were led by tech conglomerate Tencent Holdings, banking giant HSBC, and insurance titan AIA, repurchasing HKD 112 billion, HKD 86 billion, and HKD 32.3 billion, respectively.

As per recent data until February 14, 2025, the trend continues with 145 listed companies committing to share buybacks, further solidifying the market’s investor sentiment and reinforcing the notion of sustainable long-term prospectsLeading the pack again were Tencent, HSBC, and AIA, with repurchase amounts totaling HKD 14.1 billion, HKD 8.1 billion, and HKD 5.3 billion effectivelyThis strategic maneuver reflects an aggressive approach towards stabilisation and stockholder value enhancement.

The public funds are diversifying their portfolios, balancing growth and high dividend investments seamlesslyData from the first three quarters of 2024 reflect an impressive value style orientation within the Hong Kong marketHowever, by the fourth quarter, a renewed focus on growth stocks became apparent as market sentiments shifted positively

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The Hang Seng Tech Index, despite experiencing some downturn, achieved an overall annual gain of 18.70%, showcasing the resilience of the sector.

In line with this trend, public mutual funds have made a significant pivot toward sectors such as semiconductors, which by the end of the fourth quarter of 2024 amassed a market value of HKD 10.8 billion—an increase by 156% since the previous quarterFurthermore, the weight of the semiconductor industry within the mutual fund portfolios surged from 0.90% to 2.30% over the same period, marking a rise of 1.40 percentage points and setting a new record in historical termsIn recent years, its contributions were marginally lower at 0.92%, 0.85%, and 1.58% across the corresponding windows from 2021 to 2023.

This transition is mirrored with significant increases in particular holdings, with big players such as SMIC being held by 175 equity funds by the end of the fourth quarter; a substantial rise of 132 stocks, revealing a staggering increase of 190% in valueConcurrently, Huahong Semiconductor stocks reflected substantial growth with holdings up by 316% as well.

The information technology equipment sector also saw notable boosts in mutual fund stakes, with end-quarter valuation jumping 83.72% as the industry share of the portfolio escalated from 3.80% to 6.90%; the highest recorded in the past three yearsNotably, leading firms like Xiaomi, BYD Electronics, and ZTE were heavily acquired, with respective stock numbers rising 102%, 837%, and 51% alongside associated market values reflecting similar spikes.

Conversely, the allocation towards software services has remained relatively staticBy the end of the review period, software services constituted 21% of the market value within mutual funds, a minor decrease of 0.46 percentage points, sustaining its position as the largest sector by funds held.

It's essential to highlight that funds have consistently increased their stakes in industry leader Tencent Holdings for three consecutive quarters, with fourth quarter holdings climbing 144%. The returns from this strategy have begun flowing in abundantly, showcased by a 20.74% stock increase since the start of 2025.

The telecommunications sector also gained traction within mutual fund portfolios, witnessing an increase to 4.49%, the highest proportions seen in three years.

Looking ahead, market outlook reports from mutual fund managers indicate a continued expansive trajectory for technology sectors within Hong Kong stock entities throughout 2025. They suggest that, despite historic performance, the value propositions and growth opportunities extend substantially for technology firms.

Liu Dong, international business deputy director of Tianhong Fund, suggests that the Hang Seng Tech Index, despite its strong uptick, still holds promise in valuation and profit growth, projecting an EPS growth rate of 13.15% and 25.65% for the next twelve and twenty-four months respectively—bearing comparison to the Nasdaq 100 at 17.44% and 16.64% respectively.

Wang Guizhong, chief tech analyst at China Asset Management, emphasizes the robustness of Hong Kong’s internet sector regarding its business models and management strategies directed towards long-term shareholder value

This viewpoint is bolstered by the potential for an increasing number of previously US-listed tech firms returning to the Hong Kong market, thus paving the path for even more opportunities at lower valuations.

However, high dividend sectors are still seen as a cornerstone attractive option amidst this market volatilityAs articulated by the international business division director at Dacheng Fund, Bai Yang, such high-dividend yielding assets present “an essential bedrock for portfolios.”

Data illustrates that by the end of the fourth quarter, bank holdings within public mutual funds amounted to HKD 20.4 billion, representing an increase of 34.34%. These positions within the overall investment outlined a surge in weight from 3.27% to 4.35% - the highest accumulation in recent years.

Banks including China CITIC Bank, Standard Chartered, HSBC, and the major four state-owned banks including Construction Bank, Agricultural Bank, and Industrial and Commercial Bank of China, have observed increases in the number of shares held by public funds, posting growth figures as significant as 71.94%, 34.22%, 36.10%, 32.62%, 33.10% respectivelyIn contrast, certain banks like Bank of China saw slight reductions in stakes, reflecting a nuanced approach to the banking sector within the public funds' strategies.

Additionally, essential clusters such as coal, oil, and gas are also witnessing increases in public fund allocations, which now reflect weightages of 0.76% and 4.22% respectively, indicating a strategic effort to diversify portfolios effectively.

Further scrutiny of key industry allocations reveals that public funds are also leaning into automotive, industrial engineering, and consumer electronics, which now constitute 4.37%, 2.52%, and 1.68% respectively of the total market value in public fund portfolios—rising across the board in the latest quarter.

Dong Chao, a fund manager at Huitianfu, articulates the attractiveness of quality manufacturing assets characterized by a clear supply structure and stable demand, despite the lack of price volatility but showcasing strong value-creation capabilities suitable for long-term holding.

However, public fund managers do hold concerns regarding market risks and geopolitical dynamics

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