Multiple Brokerage Research Institutes: Foreign Capital May Have Returned to "Hong Kong" But Has Not Yet Formed Scale

Securities Times Reporter Wang Rui

Against the backdrop of the ongoing escalation in the Middle East situation, the narrative about foreign capital, especially Middle Eastern funds, flowing back into Hong Kong stocks has attracted continuous market attention.

Are foreign investments, including Middle Eastern funds, really flowing back? If so, how much has already been re-entered? Recently, several brokerage research institutes analyzed data and concluded that in the short term, some external funds based in the Middle East may be returning for hedging reasons, but the inflow scale is currently small and may not directly enter the stock market.

According to statistics from the China International Capital Corporation (CICC) Research Department, since the escalation of the Middle East situation, stock markets in some Middle Eastern countries have fallen over 20%, with Dubai real estate index dropping nearly 30%. EPFR data shows that active funds have shifted to outflows from the Middle East region. This indicates that hedging needs are indeed an important issue that regional funds must consider at present.

Huatai Securities’ total research team pointed out that, based on the World Bank’s CPIS cross-border portfolio investment data, China’s securities investments in the six Gulf countries have formed a stable stockpile worth hundreds of millions of dollars, highly concentrated in the UAE financial hub. When local geopolitical risks increase and regional volatility intensifies, some cross-border funds seeking liquidity, safety, and rebalancing ability tend to flow back to Hong Kong, which has a stable system, high openness, abundant RMB assets, and functions in international wealth management, forming a “Middle East hedging—Hong Kong absorption” allocation logic.

Meanwhile, the Hong Kong SAR government’s eagerness to embrace this “wealth influx” story has added more topics to the “big escape” of Middle Eastern capital. As early as March 1, Hong Kong Financial Secretary Paul Chan Mo-po publicly stated that some funds might come to Hong Kong from the Middle East due to hedging needs.

Industrial Securities’ chief strategist Zhang Qiyao said that since the outbreak of conflict between the US, Israel, and Iran, there have been signs of foreign capital returning to Hong Kong stocks. According to HKEX data, since March this year, international intermediaries have ended their previous unilateral outflows and have gradually begun to slightly re-enter, shifting to two-way trading. Additionally, estimates from HKEX custodians suggest that from March 2 to March 18, the net inflow of international intermediaries totaled HKD 210 million.

However, he also pointed out: “Recently, the increase in Hong Kong stock holdings by foreign investors is mainly driven by flexible Asia-Pacific regional funds, rather than long-term Middle Eastern capital.” On one hand, the recent market volatility has led to two-way trading by foreign investors, which does not align with the investment philosophy of Middle Eastern sovereign wealth funds and other long-term capital. On the other hand, under the backdrop of geopolitical turbulence, China’s ability to attract more Middle Eastern funds based on development certainty is a medium- to long-term variable, largely dependent on the final outcome of the US-Israel-Iran conflict, with short-term capital flows likely to be relatively limited.

Considering factors such as EPFR fund flows, exchange rates, and Hong Kong stock trading volume, Liu Gang, Chief Analyst of Overseas and Hong Kong Stock Strategies at CICC, also stated that there are some indirect clues of capital inflows into Hong Kong, such as the deepening of A-H premium discounts, but no direct evidence of large-scale stock market inflows has been observed.

According to statistics from CICC’s research department, after the escalation of the Middle East situation, EPFR data shows that active foreign investment has shifted to outflows, ending seven consecutive weeks of net inflows since the beginning of the year. European and US active funds were the main outflows, consistent with typical patterns after geopolitical risks erupt. Active Hong Kong funds and other regional funds showed some inflows. However, EPFR data cannot capture funds flowing into Hong Kong but not into the Hong Kong stock market.

In terms of market trading, last week’s average daily trading volume in Hong Kong stocks dropped from HKD 251.3 billion in the first week of March to HKD 187.5 billion. The A-share market also declined, with no signs of increased trading volume due to large capital inflows. This indicates that even if funds are entering the market, the scale is not yet large enough to impact overall market performance. Meanwhile, the Hong Kong Interbank Offered Rate (HIBOR) has continued to decline recently, reflecting a generally weak marginal demand for Hong Kong dollars, which is inconsistent with large foreign capital inflows.

Huatai Securities’ total research team stated that foreign capital entering Hong Kong does not necessarily mean entering the Hong Kong stock market directly, and its impact on Hong Kong stocks may mainly be indirect and localized.