Hang Seng Index Falls for Third Consecutive Day: Tencent and Alibaba See Southbound Inflows

Hang Seng Index Falls for Third Consecutive Day; Southbound Capital Buys Tencent and Alibaba

Hong Kong's Hang Seng Index has declined for three consecutive trading days this week, with market sentiment turning cautious. As of the latest close, the index's cumulative losses have widened, and heavyweight tech stocks have generally weakened. However, Southbound capital has bucked the trend by increasing positions in Tencent Holdings (00700.HK) and Alibaba Group (09988.HK), signaling long-term confidence in certain core assets from mainland investors.

Reasons Behind the Hang Seng's Decline

The current adjustment in the Hang Seng Index is driven by multiple factors:

• External Liquidity Tightening Expectations: The Federal Reserve has recently signaled a hawkish stance, cooling market expectations for the pace of rate cuts this year. A stronger U.S. dollar has put pressure on emerging market funds, with Hong Kong stocks, as an offshore market, bearing the brunt.
• Geopolitical Risks Intensify: Periodic fluctuations in U.S.-China relations and global trade frictions have dampened foreign investors' risk appetite for Hong Kong stocks.
• Mixed Earnings from Heavyweights: Disappointing earnings reports from some financial and property heavyweights have dragged down the index. For example, a major bank stock came under pressure due to narrowing net interest margins.

However, some market analysts point out that the Hang Seng's current valuation is at historically low levels, suggesting limited further downside, though short-term catalysts are still needed.

Tencent and Alibaba Attract Southbound Capital Despite Market Weakness

Despite the index's consecutive declines, Southbound capital has adopted a "buying on dips" strategy. According to data from the Hong Kong Stock Exchange, Southbound capital saw a net inflow of over HKD 10 billion in the past three trading days, with Tencent and Alibaba being the primary targets.

For Tencent, the company's ongoing share buybacks, coupled with successful overseas gaming expansion and rapid growth in video account advertising revenue, have made it a defensive pick with strong institutional backing. Alibaba, after completing its organizational restructuring, has shown marginal improvements in its core e-commerce and cloud computing businesses, attracting consecutive net buying from Southbound capital.

A strategist at a brokerage firm commented: "The contrarian buying by Southbound capital reflects mainland investors' recognition of the long-term value of Hong Kong's core assets. Especially at current valuation lows, Tencent and Alibaba offer compelling risk-reward profiles."

Market Sentiment and Foreign Capital Flows

Market sentiment indicators show a recent uptick in the Hang Seng Volatility Index, suggesting rising risk aversion among investors. On the foreign capital front, estimates from multiple institutions indicate a "seesaw" effect between Northbound capital (foreign investment in A-shares via Stock Connect) and Southbound capital (mainland investment in Hong Kong stocks via Stock Connect): foreign investors have been reducing positions in A-shares, while mainland investors are actively building positions in Hong Kong stocks.

This divergence reflects differing expectations between domestic and foreign investors regarding the pace of macroeconomic recovery. Foreign investors are more focused on global interest rate conditions and geopolitical risks, while mainland investors are eyeing domestic policy support and corporate earnings improvements. However, some argue that the temporary outflow of foreign capital does not signal long-term bearishness; once market sentiment stabilizes, a swift return of capital is possible.

Outlook

Looking ahead, whether the Hang Seng Index can stabilize and rebound depends on several key variables: first, clarity on the Federal Reserve's policy path; second, whether domestic economic data exceeds expectations, particularly in consumption and real estate; and third, whether heavyweight stocks like Tencent and Alibaba can sustain capital support.

In the short term, the market may remain range-bound, but sustained inflows from Southbound capital provide a floor for Hong Kong stocks. For long-term investors, the current period may offer a window to gradually build positions in high-quality leaders.