Tencent and Alibaba Lead Hong Kong Core Assets as Foreign Capital Returns, Boosting Hang Seng Index

Southbound Funds Surge, Hong Kong Core Assets Regain Foreign Favor

Recently, the Hong Kong stock market has witnessed a significant influx of foreign capital, with core assets such as Tencent Holdings (00700.HK) and Alibaba Group (09988.HK) becoming the focus of fund inflows. Market analysts point out that this trend resonates with the continuous inflow of southbound funds (Northbound Water), collectively driving the Hang Seng Index to stabilize and rebound. This article analyzes the underlying logic of this foreign capital return from three dimensions: fund flows, driving factors, and market impact.

I. Southbound Funds Continue to Accumulate, Southbound Trading Data Signals Positive Momentum

According to public data from the Hong Kong Stock Exchange, net purchases by southbound funds have significantly expanded since the fourth quarter of 2024. Among them, Tencent Holdings and Alibaba Group have consistently ranked among the top net buyers of southbound funds for several weeks, with single-week net purchases hitting new highs. Meanwhile, signs of foreign institutions increasing their holdings of Hong Kong core assets through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect have become increasingly apparent. According to Wind Information statistics, as of mid-January 2025, the proportion of foreign holdings in heavyweight stocks such as Tencent and Alibaba has rebounded compared to the end of the third quarter of 2024, ending a two-quarter decline.

This dual-driven fund pattern of "southbound funds + foreign capital" has injected liquidity into the Hong Kong stock market. Some analysts suggest that southbound funds primarily come from mainland institutions and individual investors, with a preference for tech giants like Tencent and Alibaba, reflecting long-term confidence in high-quality Hong Kong assets. In contrast, the return of foreign capital is more based on global asset reallocation considerations, especially amid expectations of a shift in the Federal Reserve's policy, leading to a trend of funds moving from high-valuation U.S. stocks to low-valuation Hong Kong stocks.

II. Driving Factors: Valuation Discounts, Policy Expectations, and Earnings Improvements

This round of foreign capital return is not accidental but the result of multiple factors converging.

First, valuation attractiveness stands out. After adjustments from 2023 to 2024, the price-to-earnings (P/E) ratio of the Hang Seng Index once fell to historically low levels, with core assets like Tencent and Alibaba trading at significant discounts compared to their U.S. counterparts. According to Bloomberg data, as of early 2025, Tencent's forward P/E ratio was below 20 times, while Alibaba's was even lower. In contrast, U.S. tech giants such as Microsoft and Apple generally had P/E ratios above 30 times. This valuation gap naturally attracts foreign capital.

Second, the policy environment has marginally improved. Since the second half of 2024, Chinese regulators have repeatedly signaled support for stabilizing capital markets and promoting the healthy development of the platform economy. For example, the State Council executive meeting explicitly stated the need to "continuously optimize the business environment and stimulate the vitality of the platform economy," directly boosting market confidence in the internet sector. Additionally, the expansion of the Stock Connect mechanism between the mainland and Hong Kong, including the inclusion of more ETFs, has provided foreign investors with more convenient investment channels.

Third, corporate fundamentals have improved. Both Tencent and Alibaba showed signs of earnings recovery in their 2024 financial reports. Tencent's advertising business benefited from the accelerated monetization of its video accounts, while Alibaba improved its profit margins by focusing on core e-commerce and cloud computing businesses. According to company announcements, Tencent reported a net profit growth of over 20% year-on-year in the third quarter of 2024, while Alibaba's net profit growth also reached double digits during the same period. These earnings improvements provide solid fundamental support for stock prices.

III. Impact on the Hang Seng Index's Performance

As the highest-weighted constituents of the Hang Seng Index, Tencent and Alibaba together account for over 15% of the index's weight, and their stock price movements directly influence the index's performance. During this round of foreign capital return, Tencent's stock price rebounded over 30% from its 2024 low, while Alibaba's gains were close to 25% over the same period, driving the Hang Seng Index from around 16,000 points back above 18,000 points, with a phased increase of over 10%.

From a fund flow perspective, foreign capital increases have not been limited to Tencent and Alibaba but have also spread to other internet leaders such as Meituan, JD.com, and NetEase, as well as financial blue chips like Ping An Insurance and China Merchants Bank. This "point-to-area" effect has resulted in over 60% of Hang Seng Index constituents recording positive returns, significantly improving market profitability.

Looking ahead, most institutions believe that if the Federal Reserve begins a rate-cutting cycle as expected in 2025, the trend of global funds returning to emerging markets is likely to continue, and Hong Kong, as China's offshore market, will directly benefit. However, potential disruptive factors include geopolitical risks, fluctuations in the renminbi exchange rate, and the pace of domestic economic recovery. Investors should closely monitor the sustainability of southbound funds and foreign capital, as well as whether corporate earnings can further exceed expectations.

Overall, the foreign capital return led by Tencent and Alibaba reflects both the valuation repair of Hong Kong stocks and the beginning of a revaluation of China's core assets by global capital. With dual support from policy and fundamentals, the Hong Kong stock market is poised for a new round of structural opportunities.