Why are Hong Kong stocks attractive again? The heavyweight stocks are dancing not just because of foreign investors' bargain hunting.

For Hong Kong stock investors, the past few days have been a cause for great celebration, with the market rising for three consecutive trading days this week.

Indeed, a single positive day can change the market's perspective. Some are even calling for Tencent to challenge the 416 Hong Kong dollar resistance level.

Let's take a look: Among the three major indexes, the Hang Seng Tech Index had the largest gain, with a cumulative increase of over 7.7% in three days. The Hong Kong Internet ETF, which is heavily invested in leading Hong Kong Internet stocks, achieved a 4.38% gain, becoming the champion of stock ETFs today.

Heavyweight stocks: Tencent (00700.HK) shares soared from HK$303.8 to HK$344.2 (both referring to closing prices) in 3 days, a 13.3% increase. Meituan rose from HK$100 to HK$113.6, and Alibaba also increased from HK$68 to HK$72.5.

This wave of heavyweight stocks' surge caught people a bit off guard. Let me try to analyze the internal and external factors behind this market movement.

External factors: Foreign investors are repositioning and bullish on the Internet sector

Reports suggest that UBS has upgraded its rating on mainland China and Hong Kong stocks to overweight while downgrading Taiwan and South Korea stocks to neutral.

It has been nearly 6 years since UBS last upgraded its investment rating on the Chinese stock market to overweight. UBS had previously upgraded its investment rating on the Chinese stock market to overweight in a report released on November 15, 2018.

In terms of sector and industry allocation, UBS has upgraded Chinese stocks to overweight, stating that consumer and internet industries have a high weighting in the MSCI China Index.

As for the reason why consumer and internet industries are more favored, UBS has also given a clear answer: China's consumer recovery. In fact, over the past 18 months, while the real estate industry was under obvious pressure, the EPS (earnings per share) of the MSCI China Internet Index grew by 23%, and consumption grew by 2%. The EPS of the MSCI China Index has only declined by about 2% over the past 18 months, outperforming other emerging markets (which fell by about 8%).

In addition to the factor of foreign investors repositioning, domestic southbound funds are also accelerating their entry into the market.

Last Friday, the China Securities Regulatory Commission released 5 measures for capital market cooperation with Hong Kong, including expanding the scope of eligible products for stock ETFs under the Shanghai-Shenzhen-Hong Kong Stock Connect, including REITs in the Stock Connect, supporting the inclusion of RMB stock trading counters in the Hong Kong Stock Connect, optimizing fund mutual recognition arrangements, and supporting leading domestic companies to list on the Hong Kong Stock Exchange.

Whichever aspect you look at, they are all favorable for the Hong Kong Stock Exchange and the liquidity of Hong Kong stocks. For example, supporting the inclusion of RMB stock trading counters in the Hong Kong Stock Connect, in plain language, means you can directly use RMB as the trading currency to buy and sell stocks listed in Hong Kong.

From the current perspective, southbound funds have already begun to pour into Hong Kong stocks in large quantities. Wind data shows that yesterday (April 23), southbound funds had a turnover of HK$37.063 billion, with a net inflow of HK$2.34 billion. This marks the 17th consecutive trading day of net buying by southbound funds, totaling HK$84.2 billion, bringing the year-to-date cumulative net buying amount to HK$202.45 billion.

Internal factors: The undervalued heavyweight stocks' value is being rediscovered

The continued rise of the Hang Seng Index is related to the surge in trading volume of heavyweight leading stocks such as Tencent and Meituan. Looking at a longer timeline, Tencent's gain is even larger: it has risen by 14.43% cumulatively in 5 trading days, and Meituan's gain is also as high as 16.45%.

The stock prices of leading Hang Seng Tech stocks such as Tencent and Meituan have been suppressed for a long time, just as I've been saying: the market will not always misjudge a good company; what we need to do is not to panic.

To put it bluntly, if the enterprise itself is a hopeless case, it's useless even if foreign investors are bullish and policies are favorable.

Just a few days ago, in the Q1 2024 reports released by public mutual funds, many star fund managers' "Shanghai-Hong Kong-Shenzhen funds" showed a phenomenon of "Hong Kong stock holdings" exceeding 50% or even 60%, with Tencent becoming a heavily held stock. For example, in the fund managed by Zhang Kun, Tencent replaced Moutai as the top holding.

It is worth noting that Tencent achieved this gain during the repurchase quiet period. I checked Tencent's favorable news over the past two days and found only two: DNF mobile game is scheduled to return; Bank of America Securities expects Tencent's full-year repurchase amount may exceed HK$130 billion.

The news of DNF's return was announced last month when the financial report was released. Bank of America's guess on the repurchase amount is a bit of "joining in the excitement". Tencent announced last month that the repurchase amount would be at least HK$100 billion, and the specific amount will not be known until the end of the year.

In short, in an upward atmosphere, the market gets excited easily. Conversely, it also reminds us that when it falls, it can be ruthless. At present, although there are more and more favorable factors for Hong Kong stocks, due to the uncertainty of the Federal Reserve's interest rate hikes, the liquidity of Hong Kong stocks is still a major hidden danger.

However, stock trading is about buying expectations. Why not use a longer-term perspective to examine Hong Kong stocks and Chinese Internet companies, choose high-quality companies, and wait patiently?

As Warren Buffett said: In the long run, the market is a "weighing machine".

$TENCENT(00700.HK)$ $MEITUAN-W(03690.HK)$ $BABA-SW(09988.HK)$

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