Hang Seng Index Drops Over 300 Points at Midday; Tech Sector Drags as Tencent and Alibaba Lead Declines

Hong Kong stocks opened under pressure on Tuesday, with the Hang Seng Index falling more than 300 points by midday, breaching a key psychological level. Market sentiment turned markedly weaker, with the tech sector leading the decline. Heavyweights Tencent Holdings (00700.HK) and Alibaba (09988.HK) were the main drags, exerting significant downward pressure on the index.

Hang Seng Midday Performance: Lower Open, Expanding Losses, Higher Volume

Hong Kong stocks opened about 150 points lower, with losses widening through the morning. By the midday close, the Hang Seng Index was down more than 300 points, a decline of over 1.5%. The market showed broad weakness among blue-chip stocks, with decliners far outnumbering advancers, reflecting strong risk aversion. Turnover in the morning session was higher than the recent average, indicating concentrated selling pressure.

By sector, technology, consumer, and property stocks led the declines, while energy and utilities were relatively resilient, showing defensive characteristics. The Hang Seng Tech Index fell even more, at one point dropping over 2% intraday, reflecting growing concerns about high-valuation growth stocks.

Tencent and Alibaba Lead Declines: Heavyweight Drag Significant

As the two largest weighted stocks in the Hang Seng Index, declines in Tencent and Alibaba directly dragged the index. Tencent fell over 2% by midday, while Alibaba dropped nearly 3%. Together, they accounted for about 120 points of the index's decline, nearly 40% of the total drop.

Market analysts attribute the pullback in Tencent and Alibaba to the following factors:

• External sentiment disturbance: Overnight, U.S. tech stocks were weak, with the Nasdaq closing lower. Markets are repricing global tech valuations, putting pressure on Hong Kong's tech sector.
• Fund flow shifts: Recent southbound capital inflows have slowed, with some funds rotating into low-valuation cyclical stocks, leaving tech heavyweights without incremental support.
• Regulatory expectations: Although policy tone has been more moderate recently, concerns persist about the long-term impact of antitrust and data security regulations on platform companies, prompting some institutions to reduce positions and wait.

Additionally, Alibaba's latest quarterly earnings showed slowing growth in its core business. Despite strong cloud performance, overall profitability fell short of some investors' expectations, triggering profit-taking. For Tencent, the gaming business faces uncertainty over game license approvals, and advertising revenue is affected by the macro environment, with few short-term catalysts.

Fund Flows: Risk Aversion Rises, Southbound Capital Sees Net Outflow

On the fund flow front, southbound trading via Stock Connect saw a net outflow of about HK$3 billion by midday, a rare occurrence recently. The tech sector saw the largest net outflows, with Tencent and Meituan (03690.HK) among the net sellers, while high-dividend stocks like China Mobile (00941.HK) and CNOOC (00883.HK) attracted net inflows, indicating a shift from growth to defensive value stocks.

Meanwhile, the Hong Kong dollar weakened, with the USD/HKD rising to around 7.85, touching the weak-side convertibility undertaking, reflecting external capital outflows. Data from the Hong Kong Monetary Authority showed a decline in the aggregate balance of the banking system, indicating tighter liquidity, which pressures equity valuations.

Outlook: Short-Term Volatility, Focus on Policy and Earnings

Looking ahead to the afternoon session and the near term, analysts believe the Hang Seng Index may find support near the round-number level, but the strength of any rebound depends on whether tech stocks stabilize. If Tencent and Alibaba narrow their losses in the afternoon, the index could recoup some ground; otherwise, if selling persists, the index may test lower levels.

In the medium term, market focus will shift to upcoming Chinese economic data and the Federal Reserve's policy meeting. According to a Reuters poll, economists expect China's Q2 GDP growth to remain around 5%, but property investment remains weak. For the Fed, markets widely expect rates to stay unchanged, but the dot plot may signal fewer rate cuts this year, which could pressure global risk assets.

For investors, caution is advised in the current environment. Focus on sectors with strong earnings visibility, such as energy, telecom, and utilities. While the long-term logic for tech stocks remains intact, short-term volatility is elevated, and investors may wait for clearer catalysts.