Haitong: How much foreign capital is involved in the current round of revaluation of Chinese assets?

Haitong released a research report stating that foreign capital is currently returning in stages. It is estimated that nearly 20 billion yuan flowed into A-shares through the northbound channel in January and February, with a peak flow of about 18 billion Hong Kong dollars into Hong Kong stocks after the Spring Festival. Referring to Hong Kong stocks, this round of inflows may be dominated by short-term flexible foreign capital, with a possibility of phase-inflows of long-term stable foreign capital, with a preference for Hong Kong-listed technology stocks. The spring market may be halfway through, with the technology sector led by the concept of China's "Seven Giants" being the mid-term theme. Attention should also be paid to sectors such as consumer goods, pharmaceuticals, and real estate with potential performance differences. Haitong's main points are as follows: Recently, foreign capital has been returning to the Chinese market in stages, mainly with short-term flexible foreign capital, with a possibility of phase-inflows of long-term stable foreign capital. In terms of A-shares, since the second quarter of 2023, northbound funds have rarely seen a large outflow from A-shares of over 200 billion yuan. However, in the recent background of multiple positive factors, northbound funds are estimated to have a net inflow of nearly 20 billion yuan from January 13 to February 21, indicating that the previous large outflow of northbound funds may have been in a phase of inflow. In terms of Hong Kong stocks, since the beginning of 2024, similar to the situation in A-shares, foreign capital has been continuously flowing out of the Hong Kong stock market. However, the inflow of southbound funds has to a large extent offset the outflow of foreign capital. The outflow of foreign capital from Hong Kong stocks after the Spring Festival may have temporarily narrowed, and even turned into a net inflow at one point, with a total inflow of about 18 billion Hong Kong dollars from February 5 to 18. Structurally, based on Hong Kong stock data reflecting the situation of foreign capital inflows into the Chinese market, observing the inflow situation of different types of foreign capital since the start of the Hong Kong stock market in mid-January, the returning foreign capital is mainly short-term flexible foreign capital. At the same time, there has been a certain narrowing of outflows from stable foreign capital after the Spring Festival, and even a turn towards net inflows. Foreign capital's participation in the technology sector of Hong Kong stocks is relatively high, but there are differences with southbound funds in the areas of consumer goods and dividends. Taking the period after the Lunar New Year, which coincided with obvious news such as DeepSeek, as a time point to observe the allocation of funds to Hong Kong stocks in various categories. Looking at the industry level, on one hand, from the perspective of incoming foreign capital, the software services and technology hardware sectors are the directions with more foreign capital inflows. Stable foreign capital inflows in software and services amounted to 6.5 billion Hong Kong dollars, flexible foreign capital inflows 27.2 billion Hong Kong dollars, and southbound funds inflows approximately 12.5 billion Hong Kong dollars. On the other hand, from the perspective of outgoing foreign capital, foreign capital mainly flows out of retail, banks, automobiles, and other consumer and dividend industries, while the Hong Kong Connect inflows into the above industries are relatively large. Looking at individual stocks, the outflow of foreign capital from the retail sector mainly stems from the reduction of holdings in Alibaba, with foreign capital outflows of about 41.6 billion Hong Kong dollars. In addition, foreign capital has also clearly flowed out of banking stocks in Hong Kong, while southbound funds have flowed into Alibaba by about 56 billion Hong Kong dollars, with significant inflows into various banking stocks. The current spring market may be halfway through, with the technology sector empowered by AI as the mid-term theme, and sectors such as consumer goods, pharmaceuticals, and real estate with significant differences in expectations should be given attention. Regarding the rhythm of short-term market interpretation, under the three major catalysts of policy stimulus, loose liquidity, and improved fundamentals, various indices in the A-shares and Hong Kong stock markets have shown significant gains. Comparing it with history, in the short term, the sustainability of this current spring market can be seen as entering the latter stage based on the time and space of the rally. From a longer-term perspective, combining three factors of policy tone shift, bull-bear cycle law, and market sentiment bottoming out, this round of the market since September 2024 is considered a reversal rather than a rebound, with the possibility of the A-shares stepping into a new stage driven by fundamentals in 2025. Structurally, the technology sector empowered by AI is the mid-term theme, with the concept of China's technology "Seven Giants" accelerating, while the supporting factors of domestic and high-end manufacturing are evident, and economic prosperity is expected to continue. In addition, compared to the technology sector, the bank believes that consumer goods, pharmaceuticals, and real estate sectors are still undervalued and under-allocated, with significant expectations differences. Risk warnings: The progress of stable growth policies is slower than expected, and the domestic economic recovery is slower than expected.