The Hang Seng Tech Index's Bearish Turn: Two Bullish Signals Emerge

The Hang Seng Tech Index (HSTI) has once again entered a "technical bear market," with the index falling more than 20% from its October high. However, amidst this downturn, two bullish signals are emerging, indicating potential opportunities for investors. This article will delve into the recent market adjustment, the role of profit-taking and position unwinding, the impact of share buyback programs, and the surge in Southbound funds' net inflows, while also exploring the implications for the overall liquidity and stability of the Hong Kong stock market.



The recent market adjustment in Hong Kong stocks has significantly impacted the Hang Seng Tech Index. On November 14, the index fell more than 20% from its high in October, re-entering a "technical bear market." This decline was part of a broader downward trend in the Hong Kong stock market, with the Hang Seng Index experiencing five consecutive trading days of decline and the Shanghai-Hong Kong Stock Connect Index also performing poorly. Most Hong Kong stocks, including those in the Hang Seng Index, have retreated from their October highs, with 71 stocks retreating more than 10% and 46 stocks experiencing a retreat of over 20%. Notably, shares of companies like Longfor Group, Ali Health, Wuxi Bio, New World Development, Baidu Group-SW, CSPC Pharma, NIO Inc., Xinyi Solar, JD Health, Wuxi Apptec, and Bud APAC have retreated by more than 30% from their October highs.

Profit-taking and position unwinding have played a significant role in the Hang Seng Tech Index's decline. Before the sharp increase that started in September this year, the overall performance of the Hong Kong stock market was lackluster, accumulating a significant number of trapped positions. The violent surge of the Hong Kong stock market in September and October led to substantial pressure from profit-taking and unwinding positions, as investors sought to secure their gains. Despite the recent adjustments in the major Hong Kong stock indices, they still have good gains compared to the lows of September. For example, the Hang Seng Tech Index is currently up 26.88% from the lows in September this year. This indicates that the recent decline is partly due to investors taking profits and unwinding their positions after the significant gains experienced earlier in the year.

Changes in share buyback programs by Hong Kong companies have also influenced the Hang Seng Tech Index's performance. For instance, Tencent Holdings, a significant constituent of the Hang Seng Tech Index, suspended its share repurchase program from October 9, 2024, until the performance disclosure date of the third quarter of 2024. Similarly, Meituan also suspended its share repurchase activity after September 26, 2024. These suspensions may have contributed to the recent market adjustments, as they reduced the demand for shares and potentially increased selling pressure. However, as companies resume their share buyback activities after passing the financial reporting period or when their stock prices enter a more favorable range in terms of cost-effectiveness, this could potentially boost the Hang Seng Tech Index's performance by increasing demand for shares and reducing the supply of available shares in the market.



The recent surge in Southbound funds' net inflows has been significant, with a net inflow of 71.345 billion Hong Kong dollars in less than half a month in November 2024. This amount is close to the total net inflow for the previous month and significantly higher than the total net inflow in September 2024. For instance, on November 14, 2024, there was a net buying of 19.656 billion Hong Kong dollars through the Southbound Stock Connect, marking the second-largest single-day net buying amount so far this year. Just recently on November 6, 2024, when the Hang Seng Index fell sharply by 2.23%, Southbound fund flow through the Stock Connect recorded a net buying of 21.487 billion Hong Kong dollars, marking the largest single-day net buying amount for the year. These figures indicate a strong trend of "buying more as it falls" by Southbound funds, which is a positive factor for the Hong Kong stock market.



These inflows of Southbound funds have a significant impact on the overall liquidity and stability of the Hong Kong stock market. These inflows indicate a strong interest from investors in the Mainland China, who are actively buying Hong Kong stocks despite the recent market adjustments. This trend, known as "buying more as it falls," suggests that investors are taking advantage of the market's downturn to accumulate shares at lower prices. The data shows that on November 14, the day of the major drop in the Hong Kong stock market, there was a net buying of 19.656 billion Hong Kong dollars through the Southbound Stock Connect. This was the second-largest single-day net buying amount for the year. Additionally, on November 6, when the Hang Seng Index fell sharply by 2.23%, Southbound fund flow through the Stock Connect recorded a net buying of 21.487 billion Hong Kong dollars, marking the largest single-day net buying amount for the year.

Since November this year, in less than half a month, the net inflow of funds through the southbound Hong Kong Stock Connect amounted to 71.345 billion Hong Kong dollars. This is close to the total net inflow for the previous month and significantly higher than the total net inflow in September this year. These inflows contribute to the overall liquidity of the Hong Kong stock market, as they increase the volume of trading and provide additional capital for investors to invest in Hong Kong stocks.

Furthermore, the steady growth in the performance of leading companies also contributes to the stability of the Hong Kong stock market. For example, Tencent's financial report for the third quarter of 2024 showed a significant increase in revenue and profit, indicating the company's strong fundamentals. This positive performance, along with the inflows of Southbound funds, helps to maintain the stability of the Hong Kong stock market despite the recent market adjustments.

In conclusion, the Hang Seng Tech Index's bearish turn has presented investors with two bullish signals: the recent surge in Southbound funds' net inflows and the steady growth in the performance of leading companies. While profit-taking and position unwinding have contributed to the index's decline, the potential resumption of share buyback programs by Hong Kong companies could boost the index's performance. As the Hong Kong stock market continues to navigate these challenges, investors should remain vigilant and capitalize on the opportunities that arise from these bullish signals.