On April 29, the Hong Kong stock market opened robustly, with the Hang Seng Index showing a remarkable surge of over 2%, piercing through the significant threshold of 18,000 points. However, as the afternoon unfolded, the momentum waned, resulting in a modest closing gain of 0.54%. This marked the sixth consecutive trading day of gains for the Hang Seng Index, while the Hang Seng Tech Index dipped slightly by 0.13%. Over the past six trading days, the two indices have accumulated impressive rises of 9.39% and 13.28%, respectively.

In conjunction with this upward trajectory, the inflow of capital from the south gradually intensified. Since March, there was only one trading day that saw a net outflow, with cumulative net inflows exceeding HKD 163 billion. Notably, more than half of the investment funds allocated to Hong Kong stocks have increased their allocation ratios in the first quarter of the year. This reflects a growing confidence among institutional investors in the region.

From the perspective of these institutional players, the recent movements in Hong Kong stocks suggest a corrective rebound as they appear to be bottoming out. This sentiment is bolstered by recent favorable policy developments and an influx of southbound funds contributing to improved liquidity. It is anticipated that measures from the regulatory front will continue to fortify Hong Kong’s long-standing position as an offshore financial hub, leading to an optimistic long-term outlook for its stock market.

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The performance of funds with exposure to Hong Kong stocks has been notably uplifting. Recent data showcases that as of April 26, out of 1,728 available funds that invest in Hong Kong stocks, over 80% reported gains during this period, with 89 funds achieving over a 10% increase in value. Particularly prominent are the Exchange-Traded Funds (ETFs), such as the Huaxia Hang Seng Internet Technology ETF and the Invesco CSI Hong Kong Stock Connect Internet ETF, which have posted returns exceeding 16% during this timeframe.

These ETFs primarily target Hong Kong's burgeoning internet sector and follow indices that have surged significantly in recent days. On April 29, these indices recorded increases of 16.89% and 16.31% since April 22. This trend resonates well with active equity funds, as 28 products managed to surpass the 10% return threshold within the same timeframe. Leading the pack is the Harvest Multi-Asset Growth Fund, with an impressive increase of 15.43% from April 22 to 26.

Notably, the ratio of Hong Kong stock investments within these funds is substantial, reflecting a strategic pivot towards the region. For instance, all of the ETF products achieving returns over 16% have more than 90% of their net asset value allocated to Hong Kong stocks. Compared to the previous year, several fund managers are now prioritizing investments in this sector, leading to an increased allocation in their portfolios during the first quarter.

According to a report considering data from 1,619 funds that invest in Hong Kong stocks, 916 have ramped up their allocations, accounting for 56.45% of the surveyed funds. Some products, such as the Qianhai Kaiyuan Shanghai-Hong Kong-Shenzhen Innovation Fund, have remarkably increased their Hong Kong stock exposure by 50.97 percentage points. Additionally, funds like the China-Europe Light Asset Fund and the Yongying Huifeng One-Year Holding Fund have lifted their allocations by over 20%.

This shift underscores a prevailing optimism among fund managers regarding the prospects of Hong Kong stocks. The manager of the Qianhai Kaiyuan Shanghai-Hong Kong-Shenzhen Innovation Fund, Zhang Jun, indicated in a quarterly report this substantial increase was motivated by an extended adjustment period in the market, creating favorable conditions. Similarly, Xu Tuo, manager of the Yongying Huifeng One-Year Mixed Fund, highlighted a strategic focus on leading real estate firms as the market begins to stabilize.

In tandem with these positive shifts, the influx of funds into the Hong Kong market continues to gain momentum. As per the latest data from Wind, southbound capital has achieved net buying for 21 consecutive days, amounting to over HKD 92 billion during this span. Notably, since March, the market has experienced only one day of net outflow, with substantial cumulative net inflows of HKD 163.59 billion.

When looking at a broader scope, net inflows from southbound Connect investments have exceeded HKD 210 billion since the beginning of the year. The Shanghai-Hong Kong Connect has contributed HKD 142.11 billion, while the Shenzhen-Hong Kong Connect has seen inflows of HKD 68.14 billion. This illustrates a significant uptick in southbound investment activity, far surpassing previous levels.

But what has led to this resurgence in the Hong Kong market, which had been on a downward spiral for a prolonged period? Are the significant capital inflows indicators that the time is ripe for strategic investments in Hong Kong stocks?

Regarding this recent rebound, Xing Cheng, the manager of the Heng Seng Qianhai Hong Kong Stock Connect Select Mixed Fund, noted that several favorable policy developments, improved marginal expectations for corporate earnings, and an optimistic adjustment of the Federal Reserve's interest rate expectations have collectively bolstered investor confidence in the short term, propelling risk appetites higher.

Wang Xincheng, the manager overseeing the Harvest Global Internet Stock (QDII) Fund, echoed similar sentiments, attributing the recent developments to robust policy support for the Hong Kong capital market. This has reinforced Hong Kong's position as an offshore financial hub, potentially setting the stage for breakthroughs in the region.

For instance, recent adjustments to expand the eligible ETF products under the Stock Connect programs are expected to facilitate the inclusion of more interconnected ETFs, aligning with Hong Kong's aspirations to bolster its international asset management stature. Including Real Estate Investment Trusts (REITs) in the Stock Connect framework is anticipated to invigorate existing assets and attract further investments.

From a valuation standpoint, Xing Cheng emphasized that the current valuation levels in the Hong Kong market are attractive from a long-term perspective. He remains optimistic about the potential for market movements in the mid-term amid the turbulent landscape, influenced by economic growth policies and the Federal Reserve's trajectory.

Moreover, the push to list more leading mainland firms in Hong Kong is anticipated to inject further vitality into its Initial Public Offering (IPO) market, which has recently seen a slowdown. According to Wind data as of April 29, there are currently 95 companies on the waiting list for listing on Hong Kong Exchanges and Clearing, with over 90% being mainland enterprises.

"Revitalizing the IPO market will enhance trading sentiment within the stock market," Wang Xincheng explained. He maintained a long-term optimistic view towards Hong Kong's prospects, stating that "today's Hong Kong is navigating a phase of transformation and transition. The prevailing low valuations and liquidity are expected to dissipate with an improvement in the macroeconomic outlook for China."

Despite recent gains, one cannot overlook that the Hang Seng Index continues to remain at historical low valuation levels. A fund manager specializing in Hong Kong equities voiced concerns over current trends where some foreign capital is pivoting from outperforming markets towards the Hong Kong sector.

Xing Cheng predicts that the current landscape for Hong Kong might still be defined by range-bound trading with structural opportunities prevailing. The sustainability of this rebound largely depends on timely and vigorous fiscal policies aimed at rekindling long-term confidence among residents and businesses, which are essential for addressing the pressing credit contraction issues hindering China's short-term growth.

Against this backdrop of cautious optimism, certain sectors have been flagged as worthy of attention. Wang Chao, a fund manager from the international division of China Merchants Fund, expressed enthusiasm for three categories of companies: those with stable business models and robust cash flows that pay high dividends; undervalued internet platforms demonstrating inherent growth potential; and leading figures within high-end manufacturing sectors such as equipment, furniture, and home appliances.

In addition, Xing Cheng highlighted the significance of capitalizing on the trends of technological innovation and industrial upgrades, particularly within the TMT (Technology, Media, and Telecommunications) and biopharmaceutical sectors. "The wave of technological innovation is promising to enhance productivity across the globe, serving as an essential condition for China's economic transformation. Therefore, we favor leaders with core competitiveness during this process of industry evolution," he stated.

Nevertheless, fund managers are also aware of the ongoing uncertainties that could impact the Hong Kong market, necessitating a vigilant approach towards risks ahead. As Xing Cheng pointed out, the coming months require that more targeted policy measures are implemented and supported by improvements in economic data, as these factors will heavily influence Hong Kong's market movements. Furthermore, external conditions such as the timing of interest rate cuts by the Federal Reserve and its fluctuating expectations continue to shape market sentiment and liquidity in Hong Kong.