The Hong Kong stock market has experienced a period of volatility recently, but despite these fluctuations, the inflow of "southbound" capital—funds flowing from mainland China into Hong Kong's markets—has remained robustAs of December 24, the cumulative net inflow of southbound capital in 2024 had reached a staggering HK$785.58 billion, significantly surpassing the total net inflow of HK$318.84 billion seen throughout 2023. In the final week of December alone, southbound capital saw a net inflow of HK$7.88 billion, maintaining a consistent positive trendWithout accounting for this week, southbound funds had been in net inflow for 17 consecutive weeks.

This steady influx of funds has been attributed to several key factors that continue to support investor optimism towards Hong Kong stocksAnalysts believe that China’s ongoing economic recovery, particularly in the real estate sector, coupled with the Federal Reserve’s dovish stance on interest rates, is creating favorable conditions for liquidity in Hong Kong’s equity markets

This combination is expected to drive an upward revision of Hong Kong’s market valuation, further reinforcing its medium-to-long-term investment appeal.

Rising Inflows Amidst Market Volatility

The Hong Kong stock market has been largely characterized by a choppy trading environment in recent weeksAs of the close of trading on December 24, the Hang Seng Index stood at 20,098.29 points, fluctuating between 19,054.40 points and 21,070.05 points over the past monthHowever, despite the market’s ups and downs, the inflow of southbound funds has remained unwavering.

According to data compiled by Wind, since November 25, southbound capital has seen a net inflow of HK$97.59 billionThis is part of a broader trend in 2024, where the cumulative net inflow of southbound funds has already surpassed HK$785.58 billion, far exceeding the HK$318.84 billion seen throughout 2023. On a weekly basis, the momentum continues, with the latest figures showing a net inflow of HK$7.88 billion

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Prior to this week, southbound funds had experienced uninterrupted net inflows for 17 consecutive weeks.

Industry-specific trends also offer further insight into the preferences of investorsIn particular, the banking sector has been a major beneficiary, with southbound capital pouring more than HK$20 billion into this segmentOther favored sectors include retail and telecommunications, each receiving over HK$10 billion in net buying from mainland investors in the past month.

The Rising Influence of Southbound Capital

Over the past few years, the proportion of southbound funds in Hong Kong’s market has been steadily rising, leading some analysts to suggest that mainland investors are gaining increasing "pricing power" in shaping the market’s dynamicsAs a result, the shifts in their investment preferences are likely to carry more weight in determining future market trends.

Xu Guanghong, Co-Head of Overseas Research at CITIC Securities, notes that as the influx of southbound capital into Hong Kong accelerates, mainland public funds are likely to increase their exposure to Hong Kong stocks, particularly in sectors such as consumer discretionary, information technology, and finance

These sectors, according to Xu, hold considerable potential for further gains, driven by both domestic economic recovery and market revaluation.

Long-Term Outlook and Structural Investment Opportunities

As the year draws to a close, market participants are beginning to turn their attention to the outlook for Hong Kong stocks in 2025. While short-term volatility remains a risk, many analysts believe the market offers significant medium-to-long-term investment potential, particularly in terms of structural opportunities.

Xu Guanghong points out that the Hong Kong stock market could experience a major turnaround in 2025. Since September 24, market liquidity has improved dramatically, risk appetite has rebounded, and short-selling activity has fallen sharply, all of which signal a recovery in investor sentimentFurthermore, whether measured by equity risk premium or dynamic price-to-earnings (P/E) ratios, Hong Kong stocks are still undervalued, and as investor sentiment continues to warm, a valuation recovery is likely to extend into the coming year.

According to Cui Shifeng, Chief Analyst for Overseas Research at CITIC Jinse Securities, the second half of 2025 could see the gradual recovery of China’s domestic growth drivers, with the real estate downturn coming to an end

As one of the key beneficiaries of China’s domestic consumption trends, the Hang Seng Tech Index could see an upward revision in earnings expectations, signaling the start of a "beta market" driven by broader economic improvementFrom a longer-term perspective, the ongoing recovery of the real estate sector and China’s broader economic rebound should support continued growth in Hong Kong stocks, potentially offering cross-quarter trading opportunitiesThis will be particularly true if the U.SFederal Reserve enters a mid-cycle rate-cutting phase, which could enhance the relative performance of Hong Kong stocks compared to their U.Scounterparts.

The Role of Overseas Liquidity and Domestic Policies

Zhou Hao, Chief Economist at Guotai Junan International, believes that the improving trend of overseas liquidity is likely to continue into 2025, which should further lift the valuation levels of Hong Kong’s markets

On the domestic side, he expects continued policy support for the economy in the coming year, which should result in gradual improvements in corporate earnings.

From an investment strategy standpoint, Zhou recommends focusing on structural opportunities across various sectorsThe overall health of Hong Kong’s stock market valuation, along with the more favorable liquidity environment, makes it an attractive destination for investmentHe suggests three key areas of focus: first, leading internet companies, which remain well-positioned for growth; second, industries that are benefiting from policy support and a rebound in domestic demand, such as consumer electronics and automotive sectors; and third, stable, high-dividend-paying sectors like utilities, finance, and telecommunications.

Xu Guanghong forecasts that in the first half of 2025, industries with pro-cyclical characteristics and higher valuation elasticity are likely to perform well