On November 26, Southbound funds unexpectedly withdrew from Hong Kong stocks. The Hang Seng Index rose 0.13% after an initial surge, while the Hang Seng Tech Index gained 0.11%. Pharmaceutical stocks continued their rebound for the third consecutive day, with Hengrui Pharmaceuticals rising nearly 5%, while tech stocks showed mixed performance.

Notably, Southbound funds recorded an unexpected net sell-off of HK$3.952 billion in Hong Kong stocks that day, abruptly ending a streak of net purchases over multiple days.

**Short-term Correction Fails to Deter ETF Inflows** Despite the recent sell-off, ETF funds have continued buying Hong Kong stocks amid market declines. On November 26, Southbound funds net sold HK$3.952 billion, following eight consecutive days of net purchases. With global market volatility weighing on Hong Kong stocks, the sudden shift in sentiment has drawn market attention.

A Shanghai-based fund manager noted that occasional single-day net sell-offs by Southbound funds do not signify a trend reversal. Some investors may be taking profits after positioning early for Hong Kong’s earnings season, contributing to short-term fluctuations.

Xing Cheng, manager of the Hengqian Haihong Hong Kong Stock Connect Value Mixed Fund, explained that stronger-than-expected U.S. non-farm payrolls and rising unemployment have heightened uncertainty, pressuring risk appetite. Global tech stocks, particularly AI-related plays, have faced corrections amid concerns over inflated infrastructure spending, dragging down Hong Kong’s market.

Year-to-date, Southbound funds have accumulated a record HK$1.38 trillion in net purchases, driving valuation recovery. The Hang Seng Index has surged nearly 30%, while the Hang Seng Tech Index has gained over 25%.

ETF flows highlight strong buying interest, especially during the second-half market slump. In November alone, the ChinaAMC Hang Seng Tech ETF and Huatai-PineBridge Hang Seng Tech ETF saw net inflows of RMB5.156 billion and RMB4.885 billion, respectively. Other sector-specific ETFs also attracted over RMB3 billion each.

Over a longer horizon, the GF China Hong Kong Stock Connect Non-Bank Financial ETF and E Fund China Hong Kong Securities Investment ETF each drew over RMB20 billion in net inflows, underscoring Hong Kong stocks as a key target for passive funds.

**A Funding-Driven Transformation in Hong Kong’s Market** 2025 has marked a pivotal shift for Hong Kong’s market, transitioning from foreign capital dominance to Southbound-driven valuation dynamics. Historically, Hong Kong’s offshore market saw valuations swayed by foreign investors’ sensitivity to policy and geopolitical risks. However, this year, ETF-led inflows have systematically reshaped pricing mechanisms.

Fullgoal Fund likened the rebound to a tightly coiled spring, with extreme undervaluation—the Hang Seng Index’s P/E ratio once hit a decade-low of 9x—laying the groundwork for recovery. Improved fundamentals and capital inflows have since propelled a remarkable "valuation reversion."

This shift is no coincidence. China’s economic recovery, bolstered by AI and consumption stimulus policies, has lifted corporate earnings. The Hang Seng Tech Index reported a 19.24% YoY net profit growth in mid-2025, with tech, healthcare, and consumer sectors leading gains. Southbound funds have emerged as steadfast buyers, while foreign capital also returned amid global macroeconomic recalibration.

The Shanghai fund manager emphasized that short-term outflows stem from profit-taking and macro uncertainties, but long-term inflows and tech sector fundamentals remain key drivers.

**Valuation Appeal Gains Traction** Despite recent volatility, Hong Kong stocks’ attractive valuations continue to lure buyers. Xing Cheng noted that stable dividends, AI tech, new consumption, and biotech opportunities make Hong Kong’s market structure favorable. Excess domestic liquidity further fuels Southbound inflows.

Fullgoal Fund highlighted that even post-rally, Hong Kong stocks remain undervalued (Hang Seng P/E at 12x vs. Nasdaq’s 36x). With Fed rate cuts easing global liquidity and Southbound demand intact, dual support from domestic and foreign capital persists.

"Hong Kong’s valuation appeal is gradually emerging," said Xing Cheng. Long-term prospects are bright, aided by China’s industrial policy support and global monetary easing. Post-2025 earnings trough, 2026 could see robust growth.

Sector-wise, AI-driven tech, reasonably priced blue-chips, and growth segments like internet, healthcare, and new consumption offer compelling opportunities.