The recent influx of funds from public mutual funds into the Hong Kong stock market is reshaping the pricing power within this financial landscapeAs we approach the end of the fourth quarter of 2024, the market capitalization of stocks heavily favored by public funds is reaching unprecedented levels, while their weighting in the overall asset allocation strategy has similarly hit historic highsThese trends signal a robust shift in investment preferences, particularly towards high-tech sectors such as semiconductors and information technologyMeanwhile, traditional high-yield sectors like banking and coal continue to attract significant attention from investors seeking stable returns.

Post-holiday trading in Hong Kong has gained remarkable momentumAs of February 18, 2025, the Hang Seng Index and the Hang Seng Tech Index recorded increases of 13.61% and 19.38% respectively since February 3, making them the top performers among major global stock indicesNotably, the Hang Seng Tech Index achieved its highest closing in three years on February 18, showcasing a robust recovery in investor confidence.

One of the primary factors influencing these shifts is the restructuring of pricing power, as emphasized by Guotai Junan's researchData indicates that the net inflow of capital into Hong Kong from the mainland had reached HKD 773.1 billion by 2024, with January alone contributing HKD 136 billion—the highest monthly inflow in four yearsThe trend continued with an additional net inflow of HKD 24.2 billion in the first two weeks of February.

Public mutual funds, as a critical component of this inflow, are significantly ramping up their investmentsAccording to Eastmoney Choice data, by the end of the fourth quarter of 2024, the market value of Hong Kong stocks in which public funds held major positions reached an all-time high of HKD 468.7 billion, reflecting a sequential growth of 1.03% and an impressive year-on-year growth of 38.12%, surpassing the increases of the Hang Seng and Hang Seng Tech indices during the same period.

In terms of asset allocation, public funds have aggressively increased their exposure to sectors such as semiconductors and information technology while maintaining a solid allocation to high-dividend sectors, including banking and coal

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This strategic reorientation showcases a conscious pivot towards sectors viewed as having substantial growth potential alongside stable returns.

Looking ahead, institutional investors—including public funds and brokerages—exhibit a generally optimistic outlookHowever, it is acknowledged that the market will likely experience fluctuations due to ongoing geopolitical tensions and the impacts of the US dollar exchange rates.

As emphasized by investment reports from brokers such as Guotai Junan, the valuation advantage of Hong Kong stocks remains a major magnet for incoming capitalBy the end of 2024, the price-to-earnings (P/E) ratio for the Hang Seng Index was recorded at 9.18, placing it in the 24.18% percentile for the past decade, considerably lower than other major markets worldwide.

The policy bonus and stock repurchase momentum have further fueled the rapid influx of capital into Hong Kong's marketA recent report from Shenwan Hongyuan highlighted the strong correlation between the Hong Kong equity market and the A-share market, noting that government measures aimed at stabilizing capital markets have positively influenced investor sentiment.

In terms of stock repurchases, 2024 saw 307 listed companies in Hong Kong engage in repurchases, totaling HKD 370.1 billionThe most significant repurchase amounts came from major players such as Tencent Holdings, HSBC Holdings, and AIA, with repurchases of HKD 112 billion, HKD 86 billion, and HKD 32.3 billion, respectively.

As of February 14, 2025, 145 Hong Kong listed companies have already engaged in stock buybacks this year, totaling HKD 42.4 billion, with the same three companies leading in repurchase amounts: HKD 14.1 billion, HKD 8.1 billion, and HKD 5.3 billion.

In terms of sector allocation, public funds are closely aligning their strategies with the trends observed in the broader Hong Kong stock market

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The first three quarters of 2024 saw a strong emphasis on value-driven stocks, but as market sentiment improved in the fourth quarter, growth stocks began to gain tractionFor example, while the Hang Seng Tech Index faced some adjustments in the fourth quarter, it still achieved an 18.70% increase for the entire year, demonstrating the strength of the technology sector's rebound.

Recent allocations by public funds illustrate this transition in focusBy the end of the fourth quarter of 2024, the collective market capitalization of semiconductor stocks held by public funds was HKD 10.8 billion, representing a remarkable growth of 156% compared to the previous quarterThe sector's weighting within the overall portfolio rose from 0.90% to 2.30%, signaling an increasing confidence in this growth market.

Within this context, notable companies emerged as favorites among public fundsFor instance, by the end of the fourth quarter, 175 equity funds significantly increased their holdings in SMIC, showing an increase of 132 funds in terms of significant holdings, leading to an almost 190% growth in portfolio valueSimilarly, Honghua Semiconductor also experienced a growth in this direction, with increasing exposure of over 300% in both number of holdings and portfolio valueThe upward trajectory reflects a clear commitment to capitalizing on lucrative opportunities within the semiconductor space.

The information technology sector also saw a significant uptick in public fund investments, with reported increases in market value of 83.72% by the end of the fourth quarter, propelling its weighting from 3.80% to 6.90% in public fund portfolios—a level not seen in the past three yearsLeading companies in this sector such as Xiaomi, BYD Electronics, and ZTE witnessed dramatic increases in their held positions, further highlighting market confidence.

Despite these developments, the software services sector's allocation among public funds saw little change, maintaining its top position with 21.00% of the total portfolio by the end of the quarter, though marginally down by 0.46% compared to the previous quarterly report.

Interestingly, public funds have consistently increased their positions in top-tier companies like Tencent Holdings over the past three quarters, reflecting a strategic focus on firms with substantial growth prospects

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Tencent has delivered a year-to-date return of 20.74% as of February 14, showcasing the benefits of this focused investment strategy.

Moreover, public funds have also recognized the appeal of the telecommunications sector, increasing its allocation to 4.49% by the end of the fourth quarter—marking the highest level in three years, up 0.31 percentage points.

From the insights shared in quarterly reports reflecting market outlook, public funds share a consensus that the technology sector within Hong Kong still exhibits significant growth potential for 2025.

Liu Dong, deputy director of international business at Tianhong Fund, asserts that despite the robust performance of the Hang Seng Tech Index in 2024, there remains favorable valuation levels and an expected acceleration in earnings growthThe projected EPS growth rates over the next 12 and 24 months stand at a promising 13.15% and 25.65%, respectively, in comparison to the Nasdaq 100's anticipated growth rates of 17.44% and 16.64%.

Additionally, Wang Guizhong, a senior research analyst at Harvest Fund, highlights the solid business models and management teams of internet firms in the Hong Kong market as key factors driving his enthusiasm for this sectorGiven the ongoing trend of internet companies returning from the US to the Hong Kong market, investors have access to a growing pool of undervalued options—further enhancing the investment landscape.

Nonetheless, high-yield sectors have not lost their allure, with Bai Yang, director of international business at Dacheng Fund, labeling these assets as "essential cornerstones" in the volatile Hong Kong marketThe consistent demand for reliable dividend income enables these sectors to maintain investor interest amid market fluctuations.

As of the end of the fourth quarter of 2024, the market value of bank stocks held by public funds reached HKD 20.4 billion, demonstrating a considerable increase of 34.34%. This pushed the sector's weighting within public fund portfolios from 3.27% to 4.35%, evidencing a growing confidence in the banking sector's resilience.

Regarding specific banking institutions, substantial increases were observed for CITIC Bank, Standard Chartered, HSBC, and the Big Four banks: Construction Bank, Agricultural Bank, and Industrial and Commercial Bank, all of which saw significant increases in their positions

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