On July 29, 2026, the Hang Seng Index closed at 22,018 points, down 0.3%, extending the recent narrow-range consolidation. However, a steady stream of capital surged behind the scenes – southbound funds recorded a net buy of HKD 6.28 billion that day, the 8th consecutive trading day of net inflow, with cumulative net inflow reaching HKD 51.2 billion. This data attracted widespread market attention. Many institutions believe that the positive liquidity signal may build momentum for the HSI rebound in H2.
Southbound funds 'rushing in': 8-day cumulative net buy exceeds HKD 50 billion
According to Wind data, since July 20, southbound funds have had daily net buys exceeding HKD 5 billion, with a single-day net buy of HKD 9.86 billion on July 23, a three-month high. As of the close on July 29, the cumulative net buy over 8 consecutive days reached HKD 51.2 billion, far exceeding the June level (about HKD 18 billion in the same period). In terms of capital structure, Shanghai-HK Stock Connect net inflow accounted for about 62%, and Shenzhen-HK Stock Connect 38%, indicating mainland institutional funds remain the main force.
Analysts point out that the large inflow of southbound funds is related to the recent stabilization of the RMB exchange rate, historically low valuations of Hong Kong stocks (HSI current P/E about 9.8 times, close to one standard deviation below the decade average), and improved policy expectations. CICC's strategy report believes that the discount of Hong Kong stocks relative to A-shares has expanded to over 35%, significantly enhancing attractiveness, and mainland funds' willingness to 'go south to bottom-fish' has increased.
Sectors being added: Dual drivers of tech and high dividend
From position changes, over the past week southbound funds mainly added two types of assets: first, oversold tech giants such as Tencent, Alibaba, and Meituan, with total net buy of about HKD 18 billion; second, high-dividend blue chips, including banks, energy, and telecom operators, with total net buy of about HKD 15 billion. Specifically, Tencent Holdings received a net buy of HKD 6.8 billion, ranking first; ICBC H-shares received HKD 3.2 billion; China Mobile H-shares received HKD 2.8 billion.
This 'both offensive and defensive' allocation strategy reflects funds seeking both safety margin and growth flexibility in a low-valuation environment. Bosera Fund's Hong Kong stock researcher pointed out that after a year and a half of adjustment, tech stocks' valuations have fallen to reasonable ranges, and initial results of cost reduction and efficiency improvement are emerging; while high-dividend sectors provide stable cash returns, fitting the current market defensive sentiment.
Sector rotation accelerates: Telecom and energy take over from financials
The industry distribution of capital flows also shows clear rotation. In early July, southbound funds mainly added financial and real estate stocks, but in the latter half of the month, the proportion of net buys in telecom, energy, and utilities sectors rose. For example, China Unicom H-shares received net buys for 3 consecutive days, totaling over HKD 1.8 billion; CNOOC H-shares received net buys of HKD 2.3 billion in the last 5 days. During the same period, the materials sector saw slight reductions, indicating a shift from cyclical stocks to stable dividend stocks.
This rotation is related to changes in the global interest rate environment. The Fed's July meeting kept rates unchanged but hinted at a possible rate cut in September, and declining U.S. Treasury yields drove repricing of high-dividend assets. Everbright Securities International pointed out that the average dividend yield of telecom and energy sectors among HSI constituents is 5.8%, higher than the financial sector's 4.2%, making them more attractive in a rate-cutting cycle.
Institutional outlook: HSI expected to challenge 23,000 points with liquidity support
Many institutions give positive outlooks on the HSI. Goldman Sachs' latest report raised its 12-month target for the HSI to 24,500 points, citing 'continued southbound fund inflows, improving corporate earnings, and policy easing.' Credit Suisse emphasized that southbound funds now account for 18% of Hong Kong stocks' daily turnover, the highest since 2021, showing enhanced voice of mainland funds and helping ease liquidity pressure.
However, cautious voices argue that net inflow of southbound funds does not directly push up the index; fundamental realization still needs attention. Morgan Stanley cautioned that the upcoming Q2 earnings season for Hong Kong-listed companies could lead to increased volatility due to performance divergence. But overall, institutions generally agree that improved liquidity is a prerequisite for the HSI to stabilize and rebound. If domestic economic data picks up in Q3, the HSI may break through the previous resistance level of 23,000 points.
Looking ahead to H2, the HSI trend still depends on the global liquidity inflection point, the pace of China's economic recovery, and geopolitical risks. The current continuous deployment of southbound funds at least provides a 'safety cushion' for the market. For investors, they can focus on tech leaders and high-dividend stocks with sustained fund inflows, and use HSI ETFs or related derivatives for portfolio allocation to capture structural opportunities.
