Hong Kong Stock Connect Expansion One Month On: Southbound Funds Flock to Tencent and Alibaba, Signaling a New Valuation Logic for Tech Stocks

Hong Kong Stocks Stock Connect Expansion One Month: Southbound Funds Snap Up Tech Giants, Signaling Valuation Reset

Since the adjustment of the eligible stocks for the Hong Kong Stock Connect took effect one month ago, the flow of southbound capital has shown distinct structural changes. Tencent Holdings, Alibaba Group, and other heavyweight tech stocks have become the core targets of this round of capital accumulation, reflecting a re-evaluation of the valuation logic for Hong Kong's tech sector. According to public data from the Hong Kong Stock Exchange, net purchases by southbound funds in the first month of the expansion were notably concentrated in newly added and existing tech leaders. This trend is interpreted by the market as a substantial increase in long-term funds' willingness to allocate to Hong Kong's core assets.

Expansion Effect Emerges: Capital Focuses on Top Tech

The latest adjustment to the Stock Connect eligible stocks took effect a month ago, with many large-cap tech companies among the new additions. In terms of capital flows, southbound funds have not shown a diversified allocation but have instead become more concentrated in mega-cap stocks like Tencent and Alibaba. According to Wind Information, in the first month of the expansion, the combined net purchases of Tencent and Alibaba accounted for over 30% of total southbound turnover, the highest for the same period in two years. Analysts point out that this phenomenon is related to the preference of institutional investors under the Stock Connect mechanism for liquid, fundamentally sound targets, and also reflects that in times of macro uncertainty, capital tends to embrace tech giants with higher certainty.

Valuation Reset Logic: From Growth Premium to Earnings Validation

Behind the capital accumulation is a redefinition of the valuation anchor for tech stocks. In recent years, the valuation of Hong Kong's tech sector has been constrained by geopolitical and regulatory pressures, with the median price-to-earnings ratio at times falling below historical averages. However, as leading companies implement cost-cutting and efficiency measures and increase share buybacks, earnings expectations have been revised upward. According to consensus estimates compiled by Bloomberg, the forward P/E ratios for Tencent and Alibaba over the next twelve months have risen about 20% since the beginning of the year, yet they remain below comparable companies on the Nasdaq. This combination of "improving earnings + valuation discount" is seen by institutions as the core driver of the accelerated inflow of southbound capital.

Moreover, the improved liquidity brought by the Stock Connect expansion has provided fertile ground for valuation reset. The trading activity of newly added eligible stocks has increased significantly, with the average daily turnover rate of some small- and mid-cap tech stocks doubling compared to before the adjustment. However, it is worth noting that capital has not blindly chased small-cap themes but has favored platform companies with cash flow generation capabilities. This "quality-first" stock selection logic aligns with the rising proportion of long-term funds such as insurance and public funds among southbound investors.

Changing Structure of Southbound Funds: Institutionalization and Long-termism

In terms of the nature of the funds, this round of southbound buying shows clear institutional characteristics. According to data from the HKSCC, among the accounts with the fastest increase in shareholding through the Stock Connect in the first month of the expansion, over 60% came from Chinese public funds and insurance asset managers. This contrasts sharply with the retail-dominated southbound trading of earlier years. The involvement of institutional funds has not only improved market pricing efficiency but also strengthened a valuation system anchored by fundamentals.

Some market participants believe that the continued accumulation of southbound funds in tech giants is essentially a vote of confidence in the long-term growth potential of China's digital economy. Despite short-term disruptions from global liquidity tightening, the earnings resilience and improved shareholder returns of Hong Kong's tech sector are attracting more allocation-type capital. If this trend continues, it could help Hong Kong tech stocks transition from a "low-valuation trap" to a "value re-rating."

Outlook: Focus on Earnings Delivery and Policy Catalysts

Looking ahead, the pace of southbound capital inflows may be influenced by multiple factors. On one hand, the path of the Federal Reserve's monetary policy remains uncertain, and under the linked exchange rate system, volatility in interest-rate-sensitive assets may increase. On the other hand, after the normalization of platform economy regulation, the policy environment has stabilized, providing room for tech companies to expand innovative businesses. According to a recent report by UBS Securities, if the interim results of Stock Connect companies continue to beat expectations, net purchases by southbound funds are likely to remain high in the next quarter.

Overall, the capital flows observed in the first month of the Stock Connect expansion are not just short-term trading behavior but a microcosm of the evolving ecosystem of the Hong Kong stock market. In the process of dual repair of earnings and valuations, tech giants are once again becoming the "ballast stone" for southbound capital allocation. For investors, while tracking capital flows, it is more important to pay attention to marginal changes in corporate fundamentals to seize the medium- and long-term opportunities brought by valuation reset.