Recent speculation about Middle Eastern capital flowing into Hong Kong for investment has attracted significant market attention amid complex geopolitical shifts in the Middle East. A detailed analysis of recent capital flows and structural trends in the Hong Kong stock market has been conducted.

Since the outbreak of the US-Israel-Iran conflict, there have been signs of foreign capital returning to Hong Kong stocks. According to data from the Hong Kong Exchanges and Clearing, international intermediaries reversed their previous pattern of unilateral outflows beginning in early March, shifting to two-way trading with modest net inflows. Estimates based on custodial data from the exchange indicate a cumulative net inflow of HK$210 million from international intermediaries between March 2 and March 18.

It is believed that the recent increase in foreign investment in Hong Kong stocks is likely driven by flexible capital from the Asia-Pacific region rather than long-term Middle Eastern capital. On one hand, recent market volatility and the two-way trading nature of foreign inflows do not align with the investment philosophy of long-term investors such as Middle Eastern sovereign wealth funds. On the other hand, although geopolitical instability may enhance China's appeal as a stable destination for Middle Eastern capital, this is expected to be a gradual, long-term adjustment heavily influenced by the final outcome of the US-Israel-Iran conflict. Short-term impacts on capital flows are likely limited.

First, it is suggested that the recent foreign buying in Hong Kong stocks may be led by agile funds such as overseas hedge funds. According to EPFR data, overseas active funds—representing long-term foreign capital—have gradually withdrawn from the Hong Kong market since March, influenced by declining global risk appetite and tightening liquidity expectations. Between February 26 and March 18, these funds sold a total of $550 million. Therefore, it is inferred that recent foreign participation in Hong Kong stocks may be dominated by hedge funds and other flexible capital. The rationale behind this shift may involve capital rotation from high-momentum markets like South Korea and Taiwan into Hong Kong stocks, where pessimistic expectations are more fully priced amid global volatility.

Second, since the outbreak of the conflict, foreign investors have been a drag on Middle Eastern stock markets, while local institutional investors have increased their holdings against the trend. Bloomberg data show that since February 27, domestic funds in Saudi Arabia, the UAE, and Qatar have seen net inflows into their equity markets. Local institutional investors injected a net $1.8 billion, $1.3 billion, and $100 million into the UAE, Saudi, and Qatari markets, respectively. Additionally, Zhu Zhaoyi, Executive Director of the Middle East Institute at Peking University's HSBC Business School, noted that if the conflict prolongs, Middle Eastern sovereign funds and other state-backed capital may repatriate funds to ensure domestic liquidity.

Third, given that the conflict is less than a month old and its trajectory remains uncertain, the likelihood of mature institutional investors making large-scale short-term portfolio adjustments is relatively low. Moreover, Middle Eastern capital often engages in global allocation through delegated investment, where professional asset managers prioritize research on macroeconomic fundamentals and corporate earnings over near-term speculative narratives.

Fourth, increased participation by Middle Eastern capital as cornerstone investors in Hong Kong IPOs reflects a long-term strategic direction rather than short-term risk aversion. Some point to the rising proportion of Middle Eastern sovereign funds in IPO cornerstone investments—from below 20% in early 2024 to around 38–39% by early 2026—as evidence of growing Middle Eastern allocation. However, no Middle Eastern capital has appeared in cornerstone investor lists for IPOs launched after mid-January, suggesting their focus remains on high-quality, distinctive enterprises rather than broad-based allocation. Zhu Zhaoyi also emphasized that Middle Eastern capital has mainly engaged in试探性建仓 (tentative positioning), with most deployments initiated before the conflict, aligning with a long-term "Look East" strategy rather than impulsive short-term hedging.

Risk Disclosure: This report is based on historical data analysis and does not constitute a recommendation for any industry or individual stock.