Hang Seng Index Falls for Third Straight Day, Breaks Below 22,000; Tencent and Alibaba Buck Trend with Southbound Fund Inflows

Hang Seng Index Falls for Third Straight Day, Breaks Below 22,000; Tencent and Alibaba Buck Trend with Fund Inflows

Hong Kong stocks have come under sustained pressure, with the Hang Seng Index falling for three consecutive trading days and breaching the key 22,000-point level. Market sentiment has turned cautious amid a mix of factors, yet tech giants Tencent Holdings and Alibaba have bucked the trend, attracting significant southbound fund inflows—a divergence that has caught investors' attention.

Market Correction: A Confluence of Domestic and External Factors

The current pullback in the Hang Seng Index is primarily driven by tightening external liquidity expectations and fluctuating domestic economic data. The Federal Reserve maintained a hawkish tone in its latest policy statement, hinting at possible further rate hikes this year, which strengthened the U.S. dollar index and intensified capital outflows from emerging markets. Meanwhile, China's industrial production and retail sales data showed slower growth, fueling debate over the pace of economic recovery. According to HKEX public data, the Hang Seng Index has fallen over 3% in the past three trading days, with trading volume remaining around HKD 100 billion, indicating fierce battles between bulls and bears.

By sector, heavyweight stocks such as property and financials led the decline, dragging down the index. Some mainland property stocks came under renewed pressure due to debt extension rumors, while bank stocks weakened on expectations of narrowing net interest margins. However, tech stocks saw relatively limited losses, providing some support to the broader market.

Southbound Funds Buck the Trend: Tencent and Alibaba as Safe Havens

Notably, despite the Hang Seng Index's decline, southbound funds have shown net inflows. According to data from the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect clearing systems, southbound funds recorded net purchases exceeding HKD 10 billion over the past three trading days, with Tencent and Alibaba accounting for over 40% of total net buying. This mirrors the behavior seen in 2024 when some funds rotated into safe-haven assets as Bitcoin broke $100,000, reflecting a logic of seeking certainty in volatile markets.

For Tencent, its recent announcement that video account advertising revenue surged over 100% year-on-year, coupled with expectations of normalized game license approvals, has bolstered its fundamental resilience in the eyes of institutions. Alibaba, meanwhile, benefits from its cloud computing business turning profitable and the expansion of its international e-commerce operations, with its latest earnings report showing a sequential improvement in adjusted EBITDA margin. Both companies boast strong cash flows and aggressive share buyback programs, making them preferred allocations for capital during a rate-hiking cycle.

Underlying Logic: Valuation Discount and Earnings Recovery

The core logic behind southbound funds' contrarian buying lies in valuation attractiveness and earnings recovery expectations. The Hang Seng Tech Index's current P/E ratio sits below the 30th percentile of its historical range, while Tencent and Alibaba trade at forward P/Es of around 15x and 12x, respectively—significantly lower than comparable U.S. tech stocks. According to multiple brokerage reports, as cost-cutting measures take effect, Tencent's non-IFRS net profit growth could reach 15%-20% in 2025, while Alibaba's core e-commerce margins are also expected to recover.

Additionally, an improving policy environment supports tech stocks. China has recently introduced several measures to promote the healthy and standardized development of the platform economy, including clarifying data security compliance standards and encouraging platform companies to participate in technological innovation. These steps have reduced regulatory uncertainty and strengthened long-term investor confidence.

Outlook: Short-Term Volatility, Structural Opportunities Remain

Looking ahead, the Hang Seng Index may continue to consolidate around the 22,000 level in the short term, awaiting more economic data and policy signals. The Fed's interest rate decision and China's PMI data will be key market focuses next week. However, tech sector leaders, backed by low valuations, high buybacks, and earnings recovery expectations, are likely to continue attracting capital. Investors may consider allocation opportunities in stocks like Tencent and Alibaba after pullbacks, while managing positions to navigate volatility risks.