Asia is expected to see a rebound in Hong Kong stock fund inflows in the second half of the year, benefiting from sector rotation

Chen Weicong, a senior investment strategy analyst at the Wealth Management Division of DBS Bank, said that in the first half of the year, global funds were mainly concentrated on AI themes, especially the upstream semiconductor sector. Stocks related to Korea, Taiwan, and Japan have become the focus. Recently, investors have begun to reduce their holdings of these high-valued shares, and there are signs of sector rotation in the market. In the second half—especially the third quarter—if such rotation continues, Hong Kong stocks are expected to benefit in the short term. However, the duration of the rotation may not last too long, and the rebound is expected to be mainly phased and cyclical.

The bank said that China’s major stock index ETF products have been seeing roughly net outflows for two consecutive quarters, which likely reflects that state-backed team funds such as Central Huijin are reducing their A-share positions. The scale is about 13 trillion yuan, which inevitably creates some disturbances to short-term market sentiment. However, the state-backed team’s selling is expected to be only a tool to curb A-share gains from rising too quickly, without having a major impact on overall liquidity. In addition, the state-backed team funds have already reduced about 90% of their stock positions, and it is believed that the deleveraging (selling) action is close to its end. If the market’s downturn worsens further in the future, it is expected that state-backed team funds will enter the market again to absorb shares in order to stabilize market confidence.

Related content 《Big bank》Goldman Sachs raises earnings forecast for East Asia Bank (00023.HK); maintains a “Sell” rating. Since the second quarter, the net inflow scale through the Stock Connect Southbound under Hong Kong stock connect has further weakened; on a year-on-year basis, it has also shrunk by more than 70%. In May, there was even a single-month net outflow, the first time since June 2023. During the period, the sectors with relatively higher net purchases by Southbound funds included semiconductors, PCB, AI large models, domestic banks, and energy. The sectors with relatively higher net selling included internet, non-essential consumer goods, and metal resources, and most of them are Hang Seng Index constituent stocks. This reflects that the heavyweight constituent stocks of the Hang Seng Index have become the main targets for Northbound capital to cash out in the recent period, temporarily limiting the index’s rebound range. However, it should not be underestimated the possibility of a shift in investors’ style in the second half. The market expects that there may be sector rotation in the second half, and some consumer and internet sectors that were previously sold off may see a return of funds.

At the end of last month, East Asia Bank lowered its full-year Hang Seng Index target price from 29,000 points forecast in April this year to 27,100 points. The target price implies that the forecast price-to-earnings (P/E) ratio was lowered from 12.6 times to 12 times. (ha/da)