FINANCE

As Hong Kong Stocks Surge, Foreign Investors Stay on Sidelines

Published: Feb. 27, 2025 5:22 p.m. GMT+8

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Hong Kong’s stock market is having a moment, but questions remain about whether the current rally will last as many foreign investors with longer time horizons have so far stayed on the sidelines.

As of Wednesday, Hong Kong’s benchmark Hang Seng Index was up 21% year-to-date, with a separate index tracking the city’s tech stocks up 37%.

The rally has been propelled by two events: the rise of the Chinese artificial intelligence (AI) company DeepSeek, and President Xi Jinping’s meeting last week with Chinese tech moguls and other private business leaders.

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Hong Kong’s Hang Seng Index is up 21% year-to-date, with the tech index rising 37%, driven by mainland inflows and AI developments like DeepSeek.
Despite the rally, long-term foreign investors remain cautious, citing market volatility and uncertainty about economic recovery.
Analysts suggest economic stimulus and AI adoption could attract long-term investors and boost Chinese equities' fair value by up to 20%.

AI generated, for reference only

Who’s Who

DeepSeek: DeepSeek is a Chinese AI company that significantly boosted Hong Kong's stock market rally. Its January 20 release of an AI model comparable to OpenAI's offerings triggered a rise in the Hang Seng Tech Index. This event attracted significant mainland Chinese investment into Hong Kong stocks, influencing the market dynamics and contributing to a surge in tech stocks by enhancing growth prospects for the Chinese economy and corporate earnings.

Zhongtai International Securities Ltd.: Zhongtai International Securities Ltd. is an investment firm mentioned in the article as having an analyst named Yan Zhaojun. The analyst noted that some global investors have increased their holdings of Hong Kong stocks, reallocating funds from Japanese or Indian markets. This indicates Zhongtai International's involvement in analyzing and providing insights into investor behavior and market trends related to Hong Kong's stock market.

China International Capital Corp. Ltd.: China International Capital Corp. Ltd. (CICC) provided analysis indicating that the recent inflows into the Hong Kong market were driven by passive funds and trading-oriented foreign funds, particularly after DeepSeek's rise caused U.S. tech stocks to slump. In the same period, there were net outflows from actively managed funds that focus on long-term investments, highlighting the preference for short-term investments amidst market volatility.

Grow Investment Group: Grow Investment Group is a Shanghai-based investment firm. According to Hong Hao, the firm's chief economist, long-term investments consider more than just returns, taking risks and price fluctuations into account. Hong suggests that both fiscal and monetary economic stimulus would be needed to support a bull market in Hong Kong.

China Asset Management (Hong Kong) Ltd.: China Asset Management (Hong Kong) Ltd. is mentioned in the article with Zhang Jun as a portfolio manager. The firm highlights the importance of an improving Chinese economy to attract long-term funds to Chinese stocks, including those in Hong Kong.

Invesco Ltd.: Invesco Ltd. is an investment management company. According to Raymond Ma, Invesco's chief investment officer for China, the development of AI in China will improve the country's economic outlook and corporate earnings. Ma highlighted that Chinese stocks currently have lower price-to-earnings ratios compared to U.S. equities, suggesting they may be a good investment opportunity.

Goldman Sachs Group Inc.: Goldman Sachs Group Inc. estimates that AI technology could boost Chinese companies' earnings per share by 2.5% annually over the next decade. This growth and enhanced confidence might increase the fair value of Chinese equities by 15% to 20%, potentially attracting over $200 billion in portfolio inflows.

OpenAI: The article compares the Chinese AI company DeepSeek's newly released model to the offering from industry leader OpenAI, implying that DeepSeek's advancements in AI are significant. However, it does not provide specific information about OpenAI itself.

AI generated, for reference only

What Happened When

Jan. 20, 2025：: DeepSeek released a model that was in the same league as OpenAI's offering, propelling the Hang Seng Tech Index.

Jan. 27, 2025：: Headlines about DeepSeek caused U.S. tech stocks to slump, allowing passive and trading-oriented foreign funds to flow into the Hong Kong market.

From Jan. 28, 2025 to Feb. 20, 2025：: Mainland investors via the stock connect programs contributed a daily average of 46.1% to Hong Kong's stock trading value.

Feb. 17, 2025：: Goldman Sachs reported that AI technology is expected to increase earnings per share of Chinese companies by 2.5% a year over the next decade.