Hang Seng Index Breaches 18,000 as Southbound Funds Defy Trend to Boost Tencent and Alibaba: Analyzing the Foreign vs. Domestic Capital Divide

Hang Seng Index Breaches 18,000, Tencent and Alibaba Gain Southbound Fund Support

Recently, the Hang Seng Index has faced sustained pressure, briefly breaching the key 18,000-point level, which has heightened market caution. Amid a dual impact of tightening external liquidity and a slowing domestic economic recovery, Hong Kong stocks have shown a weak and volatile pattern overall. However, notably, Southbound funds have not exited in tandem; instead, they have defied the trend by increasing holdings in heavyweight tech stocks like Tencent Holdings and Alibaba, creating a clear divergence between foreign and domestic capital.

Reasons for the Market Decline: Multiple Pressures Converge

The Hang Seng Index's fall below 18,000 is primarily due to the following factors:

• Hawkish Fed Policy Expectations: Although the market widely expects the Fed's rate-hiking cycle to be near its end, recent signals from several officials about "higher for longer" rates have strengthened the US dollar, increasing pressure on capital outflows from emerging markets. As an offshore market, Hong Kong is highly sensitive to dollar liquidity, and foreign capital outflows have been a key drag on the index.
• Below-Expectation Mainland Economic Data: Recent macro indicators, including industrial output and retail sales, suggest the economic recovery is not yet solid. Market views on the intensity and effectiveness of policy stimulus are divided, leading to reduced risk appetite among investors.
• Geopolitical and Regulatory Uncertainties: Escalating global trade tensions and uncertainties in certain industry regulations have further limited the valuation recovery potential of Hong Kong stocks.

Southbound Funds Defy Trend: Tencent and Alibaba as Safe Havens

In contrast to the weak market, Southbound funds have seen sustained net inflows recently, with a particular focus on Tencent and Alibaba. According to HKEX data, Tencent and Alibaba together accounted for over 40% of net Southbound purchases in the past week, reflecting domestic capital's strong confidence in these two core assets.

Analysts point out that the logic behind Southbound funds' contrarian buying is based on the following:

• Attractive Valuations: After recent adjustments, the P/E ratios of Tencent and Alibaba have fallen to historically low ranges. Given their stable cash flows and moat businesses, they offer medium- to long-term value.
• Share Buybacks and Dividends Support: Both Tencent and Alibaba have stepped up share buybacks and increased dividend payouts, providing a floor for their stock prices. For instance, Tencent's cumulative buyback amount in 2024 has hit a record high, sending a positive signal to the market.
• New Growth Drivers in AI and Cloud Computing: Both companies are accelerating their efforts in AI large models and cloud computing, fueling optimism about future earnings growth.

The Divergence Logic Between Foreign and Domestic Capital

Currently, foreign and Southbound funds show a clear divergence in their approach to Hong Kong tech stocks:

• Foreign Capital Focuses on Short-Term Risks: Affected by global interest rate conditions and geopolitical uncertainties, foreign capital tends to reduce exposure to emerging markets, adopting a strategy of reducing holdings or waiting on the sidelines for Hong Kong tech stocks. Some international investment banks have recently lowered their Hang Seng Index targets, believing that the liquidity turning point has not yet arrived.
• Domestic Capital Emphasizes Long-Term Value: Southbound funds are mainly institutional investors, including insurance companies and mutual funds, with longer investment horizons and a greater focus on corporate fundamentals and industry trends. At low valuations, domestic capital often chooses to "buy on dips," using the Stock Connect channel for counter-cyclical positioning.
• Market Structure Differences: Foreign trading is dominated by short-term hedge funds sensitive to market sentiment, while Southbound funds have a higher proportion of medium- to long-term allocators with greater tolerance for short-term volatility.

Outlook: Divergence May Gradually Narrow

Looking ahead, whether the Hang Seng Index can stabilize above 18,000 depends on several variables: first, clarity on Fed rate cut expectations—if the September FOMC meeting signals a dovish stance, foreign capital inflows could improve liquidity conditions; second, further strengthening of mainland China's pro-growth policies, particularly coordinated fiscal and industrial measures; and third, the realization of earnings recovery for heavyweight stocks like Tencent and Alibaba.

Overall, the contrarian buying by Southbound funds provides important bottom support for the Hong Kong stock market. Although the divergence between foreign and domestic capital may persist in the short term, as the macro environment improves and corporate fundamentals are validated, the two logics are likely to gradually converge. Investors should closely monitor changes in Southbound fund flows as a leading indicator of shifts in market sentiment.