Southbound funds sell off significantly, but Hang Seng Tech still rose. How do fund companies view this?

After reaching a new high in net southbound capital outflows, the Hong Kong stock market experienced a strong rebound.

On March 6, the Hong Kong market saw its first overall rally this month. By the close, the Hang Seng Index rose by 1.72%. The Hang Seng Tech Index, previously called a “drag” on the overall market performance, opened higher and continued to rise, closing up 3.15%, with a intraday high of 3.77%.

The day before this impressive turnaround, southbound funds hit a new single-day net outflow record.

On March 6, despite continued selling by southbound funds amid a rising market sentiment, the net outflow significantly narrowed from a peak of HKD 27.735 billion the previous day to HKD 2.188 billion.

Why did the market rebound? How long will the rebound last? These investor questions have been answered by responses from several fund companies.

Strong rebound of the Hang Seng Tech Index

Why did the Hong Kong market rebound quickly, even with the Hang Seng Tech Index showing an even stronger bounce?

“March 6’s rally was fundamentally a high-quality corrective rebound, not just a technical bounce. It resulted from the combined effects of external easing, strengthened policy expectations, and a return to industry fundamentals,” explained Lei Jun, General Manager of Quantitative and Index Investment at Great Wall Fund. First, as geopolitical risks abroad eased, market sentiment recovered, leading to a notable rebound in Hong Kong stocks.

Second, policy expectations continued to support the market. Recent government statements on high-quality development, technological innovation, and expanding domestic demand have provided a policy framework that supports valuation recovery, especially for tech growth assets.

During the National Two Sessions, the market paid close attention to policies aimed at stabilizing growth, boosting consumption, and supporting innovation. Official reports set a GDP growth target of 4.5%-5% for 2026, emphasizing expanding consumption, advancing technological innovation, and cultivating future industries. This helps improve sentiment for internet platforms, tech hardware, and new economy assets in Hong Kong stocks.

Finally, Lei Jun emphasized that the faster rise of the Hang Seng Tech Index is because it represents the most resilient core assets in Hong Kong stocks. It experienced deeper adjustments earlier, with more significant valuation compression, and better reflects market expectations for future growth, industrial upgrades, and risk appetite changes. Once the market begins to recover, the Hang Seng Tech Index naturally tends to outpace the main Hang Seng Index in rebound slope.

Huatai-PineBridge Vice General Manager and Index Investment Director Liu Jun also agrees that the March 6 rebound can be summarized as a result of sentiment recovery, marginal liquidity improvement, and oversold bounce resonance.

ETF continues to attract funds

It is worth noting that although southbound funds have continued to flow out over the past two days, even reaching a new single-day net outflow high, funds still keep flowing into Hong Kong stock theme ETFs. According to Choice data, on March 5, 13 ETFs linked to the Hang Seng Tech Index attracted HKD 1.437 billion in inflows.

“The ‘buy more as it falls’ trend has become evident in Hang Seng Tech ETFs,” said Liu Jun. As of March 5, the Hang Seng Tech ETF had a net subscription of 61.789 billion units this year, ranking first in the market, with total inflows of HKD 44.518 billion. Since February, the pace of fund deployment has accelerated, with net inflows of HKD 32.39 billion since February alone, accounting for over 70% of the year’s total net inflows into the ETF.

Behind this contrarian fund flow, Liu Jun analyzed that the current 20x forward P/E ratio of the Hang Seng Tech Index is at about the 10th percentile over the past five years, with rapid valuation adjustment highlighting its value attributes.

Dacheng Fund also stated that from a fund perspective, the current sector valuation is relatively low historically, and combined with improving earnings expectations and policy catalysts, it attracts capital to flow back into the sector, jointly driving the overall strength of Hong Kong’s tech sector.

Additionally, ETFs linked to the Hang Seng Internet Technology Index and the Hong Kong Stock Connect Internet Index have also seen significant net subscriptions this year, with 12.532 billion and 12.4 billion units respectively.

Looking at individual products, Huatai-PineBridge Hang Seng Tech ETF has seen the largest net inflow this year, with HKD 14.043 billion in inflows as of March 5. Its total fund size approaches HKD 80 billion, with assets totaling HKD 48.729 billion.

Is this a one-day rally or the start of a reversal?

Before the close on this day, the Hang Seng Tech Index had been correcting for five months, with a decline of over 26%. With strong policy support acting as a catalyst, how long can this rebound last? Is it a “one-day rally,” which is a key focus for investors?

“This rebound is not a one-day event; its sustainability should be viewed more positively,” Lei Jun clearly stated.

He analyzed that, besides short-term sentiment recovery, the rebound is also supported by clearer medium-term industry and policy logic. The PE ratio of the Hang Seng Tech Index is about 20x, roughly at the 20th percentile over the past year. If one believes in the “upward fundamental trend” logic, now is a good time to pay close attention.

He emphasized that the most important theme is that artificial intelligence (AI) is no longer just a thematic investment but one of the most certain industry trends in the coming years. The market’s revaluation of tech assets is driven by AI moving from model breakthroughs and computing power investments to cloud, terminals, software, applications, and commercialization, leading the entire tech industry chain into a new phase of capital expenditure and profit expectation revaluation.

“Therefore, the Hang Seng Tech Index may not be just a short-term rebound but a medium-term allocation opportunity,” he said. More and more funds now see the Hang Seng Tech Index as the most representative way to allocate Chinese tech assets in Hong Kong stocks. Especially under the ongoing policy emphasis on innovation, high-end manufacturing, digital economy, and AI, the Hang Seng Tech Index embodies one of the core main themes of the era.

Liu Jun believes that the sustainability of the rebound should be viewed dialectically. On the positive side, he notes that medium- and long-term capital recognition of the valuation at low levels for Hong Kong tech stocks is increasing; meanwhile, the operating environment for leading tech companies is stabilizing, profitability continues to improve, and earnings reports are about to be released in March, which could clear out negative surprises.

However, he also warns of two major risks: first, the still-high geopolitical uncertainties could impact oil prices and global inflation expectations, affecting the Federal Reserve’s monetary policy path and external liquidity conditions for Hong Kong stocks; second, the progress of AI commercialization could remain a medium- to long-term factor influencing the Hang Seng Tech Index’s performance, directly affecting whether the index can achieve valuation and earnings growth.

Lei Jun also agrees that geopolitical risks abroad are a market risk factor. Additionally, if the domestic economic recovery remains weak, it could slow the valuation recovery of tech assets; as an offshore market, capital flow volatility and foreign investor sentiment could also cause short-term fluctuations in Hong Kong stocks.

“In other words, the direction is positive, but the pace may still fluctuate,” he said.

Regarding levels, he emphasized that the Hang Seng Tech Index is still in a bottoming recovery phase, not at a high point for chasing gains. From a valuation perspective, as of March 6 close, the 5-day moving average of the Hang Seng Tech Index’s trading volume has only a 35% percentile in the 250-day distribution, indicating low trading congestion. Historical data shows that at this level and within ±5 percentage points, the odds and success rate of buying this index are relatively high.

“With valuations at historically low levels, policy environment marginally improving, and continuous capital inflows without a change in long-term logic, the Hang Seng Tech sector may already have high allocation value and could see further oscillation and recovery,” Liu Jun added. For long-term investors, this may be the beginning of a left-side position. Still, he cautions to remain rational and watch for external uncertainties and market sentiment shifts that could cause short-term volatility.

Dacheng Fund also stated that policy tone, earnings expectations, and capital inflows are gradually highlighting the sector’s allocation value.