CGS has released a research report stating that international liquidity largely determines the pricing power of Hong Kong-listed technology stocks. The sustained increase in southbound capital's allocation to Hong Kong stocks over the past two years is essentially a natural outcome of mainland capital seeking high-value assets globally. This is primarily due to Hong Kong stocks possessing two major advantages: a valuation trough effect and scarce, high dividend yields. The current historical valuation trough status of the Hang Seng Tech Index also implies limited room for further significant declines, endowing it with a high safety margin. In the long term, as the revenue contribution from AI businesses continues to rise, the index's valuation framework is expected to shift from an "internet valuation" model to a "tech growth valuation" model.
The main viewpoints from CGS are as follows:
**Reviewing the Recent Deep Correction in Hang Seng Tech** Since reaching a cyclical high on October 2, 2025, the Hang Seng Tech Index has remained in a sustained downtrend. As of May 11, 2026, the index has declined by 23.59%. During this period, the performance of the Hang Seng Tech Index has formed a stark contrast with the structural bull market in global equity markets, which has been broadly driven by the technology sector.
**Who Holds the Pricing Power for Hang Seng Tech?** International liquidity largely dictates the pricing power for Hong Kong-listed tech stocks. However, southbound capital has consistently provided incremental support to the Hong Kong market over the past two years. From October 2, 2025, to May 11, 2026, Hong Kong's stock market experienced cumulative net capital outflows of $29.931 billion. Notably, the sudden acceleration of outflows after January 21 closely coincided with the weakening of the Hang Seng Tech Index, reflecting the severe impact of tightening liquidity on valuation-sensitive (high-beta + growth) tech sectors.
From the perspective of active and passive funds, the outflows were predominantly from passive funds, largely driven by systematic portfolio rebalancing. In contrast, foreign funds recorded a net inflow of $27.978 billion into China-concept stocks, which likely flowed into sectors such as finance, energy, and semiconductors.
The constituent stocks of the Hang Seng Tech Index are not only heavily held by foreign investors but also a key allocation target for the Stock Connect southbound scheme. This structure of "dual coverage by both domestic and foreign capital" means that during rising phases, domestic and foreign capital can form a combined force, leading to greater elasticity. However, during declining phases, when foreign capital exits, even if southbound capital attempts to absorb the selling pressure, it struggles to fully offset the outflows due to the disparity in scale.
**Why Does Southbound Capital Buy More as Prices Fall?** The sustained increase in southbound capital's allocation to Hong Kong stocks is essentially a natural outcome of mainland capital seeking high-value assets globally. This is primarily driven by the two major advantages of Hong Kong stocks: a valuation trough effect and scarce, high dividend yields. Based on southbound capital flow data for individual Hang Seng Tech Index stocks, after the previous adjustments, southbound capital perceives that Hang Seng Tech valuations have entered an attractive range where favorable risk-reward odds prevail.
Information Technology and Consumer Discretionary sectors act as the "twin engines" for southbound capital's allocation to the Hang Seng Tech Index. The combined net inflow into these two sectors amounted to HKD 171.701 billion, accounting for 95.09% of the total net inflows (HKD 180.56 billion, representing 35.41% of cumulative southbound net inflows) across the four major industry groups analyzed.
**Why Has the Hang Seng Tech Index "Fallen Behind"?** The gains and losses of the Hang Seng Tech Index are largely contributed by a few leading companies within the index, particularly those in the Information Technology and Consumer Discretionary sectors.
At the macro level, the capital outflows from Hang Seng Tech coincided with heightened expectations for Federal Reserve rate hikes and escalating geopolitical risks.
At the industry level: Firstly, the decline in heavyweight Hang Seng Tech constituents was due to direct competitive impacts affecting their profit expectations and market share. Secondly, internal competition among heavyweight Hang Seng Tech stocks intensified. Events like the "food delivery wars" and "red envelope wars" consumed significant capital. Thirdly, certain trading strategies further exacerbated the decline in individual Hang Seng Tech stocks. Fourthly, the index composition is dominated by internet platform companies and consumer electronics firms, resulting in relatively low "hard tech" content and stronger consumer cyclical attributes. Finally, the Hang Seng Tech Index lacks a substantial second tier of companies that could help cushion the decline of the top-weighted stocks.
**What Conditions Are Needed for a Hang Seng Tech Rebound?** The current historical valuation trough status of the Hang Seng Tech Index also implies limited room for further significant declines, endowing it with a high safety margin.
In the short term, from a currency perspective, it would be prudent to wait for the US dollar to retreat to a more reasonable range. In the medium term, positioning ahead of "certainty" and awaiting a rebound from the index bottom is advisable. The 2026-2027 period is anticipated to be a critical stage for revenue realization. In the long term, as the revenue contribution from AI businesses continues to rise, the index's valuation framework is expected to shift from an "internet valuation" model to a "tech growth valuation" model.
**Risk Warnings** Risks include potential shortfalls in domestic policy implementation and effectiveness, risks of overseas interest rate cuts falling below expectations, and risks associated with unstable market sentiment.
