CICC issued a report stating that since February, Hong Kong stocks have underperformed overall, particularly with the Hang Seng Tech Index as the core asset showing the weakest performance. As of February 28, the Hang Seng Index fell by 2.8%, while the Shanghai Composite Index rose by 1.1%, and the S&P 500 declined by 0.9%. The Hang Seng Tech Index plummeted by 10.1%, whereas the STAR 50 Index and Nasdaq dropped by 1.4% and 3.4%, respectively. Since its October high, Hang Seng Tech has retreated by 20% and consecutively broken through several technical support levels. When compared to Korea’s nearly 50% increase since the beginning of the year, the contrast is stark. In terms of driving factors, compared to the positive contributions from earnings and the risk-free interest rate, the equity risk premium was the key factor, dragging down by 14.7 percentage points. Among the constituent stocks, the top five weighted stocks alone contributed to a 6-percentage-point decline.
Why has Hang Seng Tech significantly underperformed? The market has been relatively focused on the recent weak performance of Hong Kong stocks, but CICC noted that this is not surprising. In an environment where the overall credit cycle is experiencing volatile slowdowns, sectors that are still expanding naturally become the focus of capital inflows. However, if these specific structures temporarily fall out of favor in the market, combined with headwinds in capital flows, this performance becomes easier to understand.
Looking ahead to 2026, it will be challenging for Hong Kong stocks to surpass the capital flow environment seen in 2025 and will likely also lag behind mainland China’s A-shares. This is because, compared to the net inflow of 807.9 billion yuan throughout 2024, the additional scale of the 1.4 trillion yuan net inflow in 2025—mainly contributed by approximately 300 billion yuan from ETFs and other trading-oriented funds such as hedge funds and retail investors—is highly correlated with market sentiment fluctuations. Thus, unless market performance greatly exceeds expectations, surpassing last year’s fund inflows will be difficult. Additionally, while the Federal Reserve is still likely to cut interest rates, there remains some uncertainty after Volcker, which could cause more volatility for Hong Kong stocks.
Hong Kong stock IPO and refinancing activities remain active, with CICC estimating the scale may reach 1.1 trillion yuan, far exceeding the funding needs of approximately 600 billion yuan in 2025. Moreover, the large volume of IPOs in 2025, amounting to 1.8 trillion yuan, could pose potential pressure on the capital flow environment for Hong Kong stocks in 2026 due to share lock-up expirations. Potential upside surprises may come from foreign capital, especially long-term foreign institutional investors. According to EPFR data, passive foreign capital and non-European and American active foreign capital have already returned and even reached an overweight position in China at one point since 2025. However, European and American long-term funds have moved slowly and remain significantly underweight. These funds are sizable but have higher thresholds for returning, often placing greater emphasis on fundamentals. Since early 2026, there have been signs of inflows from European funds; if sustained, Hong Kong stocks, being the first destination for returning capital, would be more sensitive. CICC estimates that if active foreign funds were to fully revert to benchmark allocations for Chinese equities, it could bring inflows of 500 to 550 billion yuan, roughly equivalent to the total outflows observed during the period from March 2022 to the end of 2025.