Hong Kong's Hang Seng Index Falls for Third Straight Day; Tencent and Alibaba Buck Trend with Southbound Inflows - Outlook

Hang Seng Index Falls for Third Straight Day: Why Are Heavyweights Bucking the Trend?

Hong Kong's Hang Seng Index closed lower for the third consecutive trading day this week, with overall market sentiment turning cautious. However, amid the index's persistent weakness, southbound capital has shown a clear structural preference—Tencent Holdings (00700.HK) and Alibaba Group (09988.HK) have recorded net capital inflows for multiple days, becoming a few of the heavyweight stocks to see contrarian buying. This phenomenon has drawn market attention: why are funds choosing to increase holdings in these two tech giants while the Hang Seng is under pressure? And how will their subsequent performance unfold?

Hang Seng Under Pressure: Multiple Factors at Play

The recent adjustment in the Hong Kong stock market has been primarily driven by dual pressures from the external macro environment and internal liquidity. On one hand, the Federal Reserve released a hawkish signal after its latest meeting, delaying market expectations for the pace of rate cuts and cooling global capital flows into risk assets. On the other hand, while mainland economic data shows a recovery trend, structural divergence across sectors is evident, and market expectations for the intensity of policy stimulus have been revised. Under the combined effect of these factors, the Hang Seng Index has fallen from its recent highs, declining for three consecutive days with shrinking trading volume.

Contrarian Capital Inflows: The Unique Logic Behind Tencent and Alibaba

Despite the weak broader market, southbound capital has shown a clear preference for Tencent and Alibaba. According to public data disclosed by the Hong Kong Stock Exchange, over the past three trading days, both Tencent and Alibaba ranked among the top in net buying by southbound capital, with total net inflows exceeding tens of billions of Hong Kong dollars. Behind this phenomenon lies a repricing of the fundamentals and valuation safety margins of these two companies.

First, from a valuation perspective, the current price-to-earnings ratios of Tencent and Alibaba are both at historically low percentiles. After sustained buybacks and business optimization since 2022, Tencent's earnings resilience in its gaming, advertising, and cloud services segments has been validated. Meanwhile, following its organizational restructuring, Alibaba's core e-commerce business and cloud computing division are showing increasing synergies. Second, both companies possess strong cash flow generation capabilities and consistently reward shareholders through buybacks and dividends, which is attractive to long-term capital in the current low-interest-rate environment. Additionally, market expectations for the commercialization of large AI models provide a new growth narrative for both Tencent and Alibaba—Tencent's Hunyuan large model and Alibaba's Tongyi Qianwen are both accelerating integration with existing businesses, potentially contributing incremental revenue by 2025.

Outlook: Short-Term Volatility Does Not Undermine Long-Term Value

Looking ahead, analysts point out that the Hang Seng Index may still face short-term constraints from external liquidity tightening and geopolitical uncertainties. However, as core assets in Hong Kong stocks, Tencent and Alibaba's fundamental resilience is expected to support relatively strong stock performance. From a liquidity perspective, the trend of sustained southbound capital inflows remains unchanged. As mainland mutual funds and insurance funds increase their allocation to Hong Kong stocks, Tencent and Alibaba, as highly liquid heavyweight stocks, will continue to benefit from incremental capital inflows.

Nevertheless, investors should also be aware of potential risks. On one hand, if expectations for Fed rate cuts are further delayed, global tech stock valuations may face periodic pressure. On the other hand, investments by Alibaba and Tencent in AI are still in early stages, and commercialization outcomes remain uncertain. Overall, during the Hang Seng Index's bottoming-out process, Tencent and Alibaba, with their moats and valuation advantages, are likely to become preferred targets for capital seeking safe havens and positioning for a rebound.