Hang Seng's Three-Day Rally Sparks Capital Divergence: Can Hong Kong Stocks Sustain the Rebound? Tencent and Alibaba Earnings in Focus

Hang Seng's Three-Day Rally Sparks Capital Divergence: Can Hong Kong Stocks Sustain the Rebound?

The Hang Seng Index has posted three consecutive daily gains recently. While the cumulative increase is not dramatic, it has been enough to briefly lift market sentiment from weeks of gloom. However, as the index approaches key resistance levels, capital flows are showing clear divergence: on one hand, the net buying volume of southbound funds has narrowed; on the other, some foreign institutions have reduced their holdings of previously heavily weighted tech stocks during the rebound. This divergence has left investors widely wondering: how far can this Hong Kong stock rally really go?

Rebound Drivers: Valuation Repair and Policy Expectations Converge

The core drivers of this rebound come from two levels. First is the need for valuation repair. The Hang Seng Index had fallen to near three-year lows in the prior correction, with its P/E ratio dipping below 9 times and its P/B ratio even falling below 1, making it a valuation trough among major global markets. When oversold signals accumulate to a certain point, technical buying naturally emerges. Second is the heating up of policy expectations. Recently, mainland regulatory authorities have repeatedly signaled measures to stabilize capital markets, including optimizing the Stock Connect mechanism and encouraging listed companies to pay dividends and buy back shares, which directly boosted liquidity expectations for Hong Kong stocks. Additionally, although expectations for a Fed rate cut have fluctuated, global funds' willingness to allocate to emerging markets is marginally improving, and Hong Kong stocks, as an offshore market, benefit first from this trend.

Capital Divergence: The Game Between Southbound and Foreign Funds

Despite the index's consecutive gains, structural contradictions in capital flows cannot be ignored. According to data disclosed by the Hong Kong Stock Exchange, during the three-day rally, the average daily net buying volume of southbound funds fell by about 20% compared to the previous week, and the buying targets shifted from broad-based ETFs to high-dividend stocks, indicating that mainland funds are leaning toward defensive positioning. Meanwhile, some foreign institutions reduced their holdings of tech leaders like Tencent and Alibaba during the rebound. According to market sources, a large sovereign fund sold about 1% of its Tencent holdings during the rally. This pattern of "mainland funds providing support, foreign funds cashing out" reflects divergent views on the market's outlook: mainland funds focus on low valuations and policy support, while foreign funds worry about the pace of earnings recovery and geopolitical risks.

Core Variable: Earnings Surprise Potential for Tencent and Alibaba

Over the next two weeks, Tencent Holdings and Alibaba will release their quarterly earnings reports, which will be a key test of the rebound's strength. The market generally expects Tencent's advertising business and WeChat Video Channel commercialization to continue contributing incremental growth, but its gaming business faces uncertainty from the pace of game license approvals. Alibaba is focusing on cloud business profitability improvement and market share changes at its Taobao and Tmall Group. According to Bloomberg consensus estimates, Tencent's revenue growth this quarter is expected to remain in the 8%-10% range, while Alibaba may record year-on-year growth of 5%-7%. However, the real focus is on the profit side: both companies are in a cost-cutting and efficiency-improving cycle. If actual profit margins exceed expectations, it will directly strengthen market confidence in the earnings bottom for Hong Kong tech stocks. Conversely, if the earnings show intensified competition or higher-than-expected spending, it could trigger a new round of valuation downgrades.

Outlook: Three Hurdles for the Rebound to Continue

Overall, for the Hong Kong stock rebound to continue, it needs to clear at least three hurdles. The first hurdle is the sustainability of liquidity improvement. The uncertainty around the timing of Fed rate cuts remains the biggest external variable; if U.S. bond yields rise again, it will suppress the valuation recovery space for Hong Kong stocks. The second hurdle is an upward revision of earnings expectations. Currently, the 2024 earnings forecast for the Hang Seng Index is still in a downward trend. If Tencent and Alibaba's earnings cannot reverse this situation, the rebound will lack fundamental support. The third hurdle is the rebalancing of capital structure. Whether southbound funds can shift from defense to offense, and whether foreign funds are willing to replenish positions after earnings, will determine the breadth and depth of the rebound.

In the short term, the Hang Seng Index faces strong technical resistance near the 18,000-point level, and a breakout would require average daily turnover to expand to over HK$150 billion. In the medium term, if policies continue to release positive signals (such as lowering the threshold for Stock Connect or expanding the scope of ETF Connect), and if corporate earnings show signs of a turning point, Hong Kong stocks could evolve from a oversold bounce to a trend-based recovery. When participating in the rebound, investors should focus on high-dividend state-owned enterprises, internet leaders, and hardware stocks benefiting from AI computing demand, while closely tracking earnings season's surprise potential.