Capital flows and geopolitical risks: Southbound trading recorded its largest single-day outflow. 1️⃣ According to EPFR data (through Wednesday), active foreign capital outflows from Hong Kong stocks reached $360,000 (compared to an inflow of $260 million last week), ending a seven-week inflow streak. Inflows into A-shares were $170 million (vs. $110 million last week). Passive foreign inflows into Hong Kong stocks decreased to $1.85 billion (vs. $2.44 billion last week), while inflows into A-shares were $990 million (compared to an outflow of $430 million last week). By fund source, China-focused funds saw the largest inflows, while Asia ex-Japan funds experienced accelerated outflows. Global, emerging market, and global ex-US funds also recorded outflows.
2️⃣ Southbound trading: Outflows occurred from Wednesday to Friday, with Thursday's outflow reaching HK$27.7 billion, marking the largest single-day outflow in history. Total outflows amounted to HK$8.1 billion (vs. an inflow of HK$6.7 billion last week), with a daily average outflow of HK$1.62 billion (compared to an average inflow of HK$1.68 billion last week). The largest net inflows were seen in Tencent, Xiaomi, Hang Seng Tech Index, and CNOOC, while outflows were observed in the Tracker Fund, Alibaba, and SMIC.
Last week's two major events: Iran tensions and the National Two Sessions. Global assets reacted sharply, with only commodities and the US dollar rising, while equities broadly declined. Emerging markets and European stocks fell the most, with Hong Kong stocks underperforming A-shares. Active capital outflows aligned with typical patterns during geopolitical conflicts, reminiscent of initial market reactions during the Russia-Ukraine conflict. However, liquidity stress led to selling of safe-haven assets like gold and US Treasuries, contributing to sharp declines in markets such as South Korea.
How will Iran tensions affect markets? There are no signs of easing yet, with Brent crude surging above $93 per barrel. The key drivers remain the duration, intensity, and scope of the conflict—particularly its duration—though these are difficult to predict. As an alternative approach, within manageable factors, we recommend: 1) Monitor the US dollar. Significant dollar strength is generally unfavorable, not due to optimism about the dollar, but because of cash demand. In such scenarios, nearly all assets (including safe havens) may be sold off. 2) Track oil prices. If disruptions persist beyond two weeks, oil could test the Russia-Ukraine peak of $120 per barrel. If resolved quickly, prices may fluctuate around $80.
Looking ahead: 1) If oil prices rapidly surge to $100 or higher, short-term volatility could trigger liquidity risks. In this scenario, only cash (US dollars) may serve as a safe haven, with potential buying opportunities emerging after stabilization. 2) If oil prices fluctuate between $80–90, the primary risk would shift from acute liquidity shortages to chronic pressures. This could elevate US inflation and delay Fed rate cuts, though likely only temporarily. It would also impact Chinese corporate profitability, particularly for midstream and downstream sectors, and increase import costs.
Regarding the Two Sessions, from a credit cycle perspective, the most critical information from the government work report involves fiscal intensity and policy direction. Overall fiscal stance remains neutral, leading to credit cycle fluctuations or periodic weakness, consistent with our earlier expectations. Policy structure leans toward investment support, with potential weakness in the second quarter. The 2026 government work report will provide further clarity on credit cycle trends from a fiscal perspective.
For markets, the credit cycle determines index performance, which explains our conservative index targets. Opportunities may arise from: 1) Market corrections, such as the significant decline in the Hang Seng Tech Index. While catalysts are needed for a strong rebound, low valuations and oversold conditions make it less unattractive. 2) Structural trends aligned with credit expansion directions, with AI technology and cyclical sectors remaining key medium-term themes.
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