Hang Seng Index Rallies for Third Day to Reclaim 18,000; Southbound Funds Net Inflow for Fifth Consecutive Day - Can the Rebound Last?

Hong Kong's Hang Seng Index has risen for three consecutive trading days, reclaiming the 18,000-point psychological level, signaling a clear improvement in market sentiment. Meanwhile, southbound funds have recorded net inflows for five consecutive sessions, providing solid liquidity support for the Hong Kong stock rebound. This article examines the drivers of this rally from three dimensions: capital flows, policy, and the external environment, and explores the sustainability of the uptrend.

Capital Flows: Southbound Funds Continue to Accumulate, Favoring Internet and High-Dividend Stocks

According to data from the Hong Kong Stock Exchange, cumulative net inflows from southbound funds have exceeded HK$10 billion since the start of the week, with five consecutive days of net inflows being a relatively rare occurrence recently. In terms of individual stock flows, funds have been concentrated in leading internet companies, high-dividend bank stocks, and select new energy names. Analysts point out that the sustained buying by southbound funds reflects mainland investors' recognition of the valuation discount in Hong Kong stocks, and is also linked to the recent stabilization of the RMB exchange rate and rising expectations for reform of the Stock Connect dividend tax.

Notably, the pace of southbound buying this time differs from previous episodes—rather than large one-off purchases, it has been characterized by a "steady trickle," with daily net inflows maintained at levels of several billion Hong Kong dollars. This steady inflow pattern is more conducive to building a market bottom and reduces short-term volatility risk.

Policy: Domestic Pro-Growth Measures Intensify, Improving Earnings Expectations for Hong Kong Stocks

Recently, a series of pro-growth policies have been rolled out domestically, including increased infrastructure investment, optimization of real estate regulation, and measures to boost consumption. These steps are expected to improve earnings expectations for Hong Kong-listed companies, particularly in heavyweight sectors such as property, financials, and consumer. According to a research report by CICC, forecasts for Hong Kong stock earnings growth in 2024 have been revised up from low single digits to mid-to-high single digits, and the improvement in earnings expectations is one of the core drivers behind the index's rise.

Furthermore, regulators have become increasingly supportive of the platform economy, significantly reducing policy risks for the internet sector. Many institutions believe that the valuation recovery in Hong Kong's internet sector is not yet over and that there is still upside potential.

External Environment: Rising Fed Rate Cut Expectations Boost Global Risk Appetite

On the external front, U.S. inflation data have continued to decline, reigniting market expectations for a Fed rate cut this year. According to the CME FedWatch tool, the probability of a rate cut in September is now above 70%. As a result, the U.S. dollar index has weakened, easing pressure on the RMB exchange rate. As an offshore market, Hong Kong is particularly sensitive to changes in external liquidity, and the trend of global funds returning to emerging markets is favorable for Hong Kong stocks.

At the same time, U.S. stocks technology shares have continued to strengthen, with the Nasdaq index hitting record highs, lifting global risk appetite. Hong Kong's tech sector has a strong correlation with U.S. tech stocks, and the strong performance of external markets provides additional support for the Hong Kong stock rebound.

Outlook: Can the Rally Continue? Watch Volume and Policy Implementation

Despite the strong short-term performance of Hong Kong stocks, the sustainability of the rally depends on several key variables. First, whether trading volume can continue to expand. According to Wind data, on the day the Hang Seng Index reclaimed the 18,000-point level, main board turnover exceeded HK$150 billion, but if volume shrinks in subsequent sessions, the strength of the rebound may weaken. Second, the effectiveness of domestic policy implementation needs time to be verified; whether indicators such as property sales data and social financing growth improve will directly affect market confidence.

From a valuation perspective, the Hang Seng Index's current price-to-earnings ratio remains in the mid-to-low range historically, while the dividend yield remains at a relatively high level, indicating long-term allocation value. The continued inflow of southbound funds also reflects mainland capital's optimism about the long-term prospects of Hong Kong stocks. However, in the short term, the market may face profit-taking pressure, and investors should be mindful of the pace.

In summary, this Hong Kong stock rebound is the result of a confluence of capital flows, policy support, and the external environment. The short-term trend is positive, but medium-term sustainability depends on confirmation of fundamental improvements. Investors are advised to monitor the effects of policy implementation and changes in overseas liquidity, and adjust positions flexibly.