Tracking $2.8T Foreign Capital: What Are They Buying?

As China's stock market warms up and the economy stabilizes, under the nature of capital seeking profit, foreign capital is expected to continue flowing back to China. After a strong rebound, A-shares have recently entered an adjustment phase. What are the movements of foreign capital in this round of ups and downs?

The latest research report shows that from September 26th to October 9th, foreign capital has been continuously flowing into A-shares. According to a research report from CICC, from October 3rd to 9th, active foreign capital and passive foreign capital in A-shares respectively inflow 200 million US dollars and 4.1 billion US dollars, which are all increased compared to the previous week's data (September 26th to October 2nd, the same below). The inflow amount of foreign capital in Hong Kong stocks and ADRs (American Depositary Receipts) is also increasing.

Wind data shows that from October 1st to 7th, in the four trading days during the National Day holiday without the support of southbound funds, the total daily transaction amount of the main board and GEM of the Hong Kong stock market is three times that of the previous period (from the beginning of 2024 to September 23rd).

Zhang Yidong, the global chief strategist of Xingye Securities and the chief economist of Xingye International, said on October 2nd that foreign capital is the main force driving the previous surge in Hong Kong stocks. "With the warming of China's stock market and the stabilization of the economy, under the nature of capital pursuing profit, European and American funds and funds from 'Belt and Road' countries are expected to start a new round of enthusiasm for allocating China's stock market."

The flow of northbound funds (Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect) is the main window to observe the movements of foreign capital in A-shares. However, after August 16, 2024, the official adjusted the information disclosure mechanism of the Shanghai-Shenzhen-Hong Kong Stock Connect, and no longer discloses the daily purchase amount, sale amount, and security holding information of northbound funds in detail, but discloses the total transaction amount, total number of transactions, and ETF transaction amount, and the security holding information is changed to quarterly disclosure.

From the perspective of information disclosure data, since the rebound of A-shares in this round, the transaction amount of northbound funds has increased significantly. Since the market rebound on September 24th of this round, as of October 15th, the total transaction amount of northbound funds is 2.8 trillion yuan, with an average daily transaction amount of about 277 billion yuan, which is 2.87 times that of August.

Recently, the third-quarter holding data of northbound funds has been announced, which is the first appearance of the quarterly holding data of northbound funds after the adjustment of the Shanghai-Shenzhen-Hong Kong Stock Connect information disclosure mechanism. Wind data shows that as of the end of the third quarter this year, northbound funds hold a total of 132.312 billion shares of A-share companies, with a holding market value of 2.41 trillion yuan. Compared with the daily frequency data of northbound funds before the suspension on August 16th, they have increased by 7.3 billion shares and 500 billion yuan, respectively.

From the perspective of capital flow, in the A-share market, foreign capital focuses on inflows into industries such as banking, telecommunications services, and technology hardware and equipment; in the Hong Kong stock market, during the National Day holiday, foreign capital focuses on inflows into diversified finance and real estate.Recently, the market has experienced a correction, with some foreign capital choosing to take profits and exit. In the A-share market, from October 9th to 15th, when the market corrected, many stocks heavily held by Northbound funds fell by more than 15%. During the same period, the Shanghai Composite Index and the Shenzhen Component Index fell by 8% and 12%, respectively.

Foreign capital is still increasing its holdings in Chinese assets

Recently, after a significant rise, A-shares and Hong Kong stocks have started to correct, but foreign capital is still increasing its holdings.

A report released by CICC shows that from October 3rd to 9th, A-shares active foreign capital and passive foreign capital inflows were $200 million and $4.1 billion, respectively, which are both higher than the previous week's $190 million and $2.64 billion. Among them, the inflow of passive foreign capital increased by more than 50%.

CICC pointed out that from October 3rd to 9th, foreign passive funds continued to accelerate inflow, still mainly Chinese regional funds, which may still represent the excitement of non-institutional investors. "Active funds continued to flow in, but the largest inflow among them, focused on Chinese regional funds, narrowed, while funds focused on Asia excluding Japan turned to outflow, still reflecting the cautious attitude of foreign capital."

According to media reports, from October 7th to 11th, Chinese assets occupied six of the top ten global ETF fund inflows, showing strong gold absorption capacity.

As the A-share market enters adjustment after a significant rebound, the daily transaction volume of Northbound funds has declined after breaking through 500 billion yuan, but it is still at a high level.

WIND data shows that from September 24th to October 15th, the average daily transaction volume of Northbound funds was 277 billion yuan, 2.87 times the average daily transaction volume of 96.6 billion yuan in August.

During this period, the daily transaction volume of Northbound funds increased from 165.3 billion yuan to 510.1 billion yuan on October 8th, and then declined gradually in the following four trading days, but still exceeded 220 billion yuan. Among them, from September 27th to October 15th, the daily transaction volume of Shenzhen Stock Connect exceeded 100 billion yuan.

WIND data shows that the daily transaction volume of Shenzhen Stock Connect exceeded 100 billion yuan as far back as July 16, 2020, when A-shares were in a rebound trend, with the Shenzhen Component Index rising from 10,653.49 points on May 28th of that year to 12,996.34 points on July 16th, and then rising to 16,293.09 points on February 18, 2021.In terms of Hong Kong stocks, foreign capital is also flowing in.

Research reports from CICC show that from October 3rd to 9th, Hong Kong stocks and ADR overseas funds saw a net inflow of $4.44 billion, which is 1.48 times the previous week's $2.99 billion, setting a new high since 2016.

Recently, Hong Kong's Financial Secretary, Paul Chan, stated that since the central government introduced a series of stimulus measures, U.S. and European investors have made strong net purchases in the Hong Kong stock market, accounting for about 85% of buyers by amount. Among them, 90% are long-term funds and investment banks. Interest in the Hong Kong stock market is also growing in the Middle East, with two ETFs tracking Hong Kong stocks to be listed and traded on the Saudi stock exchange later this month.

During the National Day period from October 1st to 7th, in the four trading days without the participation of southbound funds, the total transaction amount of the main board and GEM board of Hong Kong stocks was about 255.7 billion Hong Kong dollars per day on average. Before this round of sharp rise, that is, from the beginning of 2024 to September 23rd, the above data was only about 81.5 billion Hong Kong dollars.

Li Shiyu, chairman of Guangdong Xiaoyu Private Equity Fund Management Co., Ltd., said that the main reason for foreign capital's large-scale purchase of A shares and Hong Kong stocks in the early stage was that the Federal Reserve began to cut interest rates, and the funds that "fled" from the market in recent years began to flow back to the A-share and Hong Kong stock markets. The second reason is that the high level introduced a series of policies to protect the stock market, and the early stage was a very typical "incremental universal rise" market.

In the view of Galaxy Securities, in addition to the policy level's good news, the performance of Hong Kong stocks has shown a trend of recovery, providing fundamental support for the early stage of Hong Kong stocks. In the first half of 2024, the total operating income of all Hong Kong stocks increased by 2.8% year-on-year, and the net profit attributable to the parent company increased by 4% year-on-year, both of which significantly improved compared to the whole year of 2023.

Banks and other industries that have been heavily bought

What industries have foreign capital focused on?

From the perspective of capital flow, in the A-share market, foreign capital focuses on buying banks, telecommunications services and other industries; in the Hong Kong stock market, foreign capital focuses on buying diversified finance and real estate during the National Day holiday.

Since August 16, 2024, the holding details of foreign capital's northbound funds have been changed from daily disclosure to quarterly disclosure, and the flow of northbound funds can only be seen from the holding data at the end of the third quarter.With the recent release of foreign capital's third-quarter stock holding data, their positions in the A-share market have also come to light.

Wind data shows that from August 16 to September 30, looking at the industries, the top three industries with the largest net purchases by Northbound capital were banking, technology hardware and equipment, and telecommunications services, with net purchases of 1.19 billion yuan, 609 million yuan, and 446 million yuan, respectively. In terms of the number of shares increased, the top three industries with the most shares increased by Northbound capital during the aforementioned period were also these three industries.

From September 24 to October 15, 2024, the aforementioned three industries increased by 15%, 27%, and 13%, respectively, with the technology hardware and equipment industry ranking fourth in industry gains.

Looking at individual stocks, from August 16 to September 30, among the top ten net purchase companies on the Shanghai-Shenzhen Stock Connect, China Unicom (600050.SH), Seres (601127.SH), and Agricultural Bank of China (601288.SH) ranked first, second, and third, with net purchases exceeding 180 million yuan, among which China Unicom led with a net purchase of 430 million yuan. Among the top ten net purchase companies on the Shanghai-Shenzhen Stock Connect, there were five banks on the list, accounting for half.

Among the top ten net purchase companies on the Shenzhen Stock Connect, Ping An Bank (000001.SZ), O-Film Tech (002456.SZ), and Luxshare Precision (002475.SZ) ranked first, second, and third, with net purchases exceeding 130 million yuan, with Ping An Bank leading with a net purchase of 135 million yuan. Looking at the industries, there were six companies from the technology hardware and equipment industry on the list.

From September 24 to October 15, the stocks of the aforementioned six companies回调ed after a sharp increase. During this period, the increase of the stocks of the six companies exceeded 6%, among which Ping An Bank's increase exceeded 20%.

In the view of CITIC Securities, the advancement of a "package" of policies helps to gather market recovery expectations, thereby consolidating the dividend value space of bank stocks. Coupled with the continuation of financial product allocation logic, the absolute return logic will continue.

An asset management person told Caijing that from the perspective of foreign capital purchases, it is basically industry leading blue-chip stocks. In addition to these companies having a stable basic face and smaller risks, they are also heavily held stocks of quantitative and index funds. If foreign capital allocates assets in the Chinese stock market, these companies are the first choice.

In terms of Hong Kong stocks, foreign capital focuses on purchasing diversified finance and real estate industries.

During the four trading days from October 1 to 7 of the National Day holiday, in the absence of southbound capital inflow, looking at the net inflow of funds from Hong Kong stocks, diversified finance, real estate, pharmaceuticals, biotechnology, and life science industries ranked the top three, with a total net inflow of funds of 3.6 billion yuan, 1.7 billion yuan, and 1.3 billion yuan, respectively. During this period, the increase of the aforementioned three industries exceeded 20%.According to data disclosed by the Hong Kong Stock Exchange, since September 24, international investment institutions such as Morgan and Goldman Sachs have started to increase their holdings in Hong Kong stocks, including industry leaders like Alibaba-W (9988.HK).

As the market retraces, some foreign capital has chosen to take profits and exit.

Media reports indicate that according to a trading report from Goldman Sachs Group, hedge funds sold a record number of Chinese stocks on October 8. Hedge funds not only closed their long positions but also increased their short positions, with the long positions sold being twice as much as the short positions.

From October 8 to 15, in the Hong Kong stock market, the three major industries that were heavily bought by foreign capital during the National Day period all showed a net outflow of funds.

During the A-share market correction, the stock prices of some companies with foreign capital holdings also fell. Wind data shows that as of September 30, there were about 31 companies with a holding ratio of more than 10% in Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect. During the market correction and fluctuations from October 9 to 15, the stock prices of 30 of the aforementioned companies fell, with Inovance Technology (300124.SZ) and Pechoin (603605.SH) seeing the largest declines of 24% and 21%, respectively.

What will the future capital flow be like?

After the market correction, international institutions hold different views on the future performance of the Chinese market.

Goldman Sachs pointed out in a research report on October 7 that it expects Chinese equity assets to still have an upward space of 15%-18% in the future.

Bank of America Securities stated that the current expectations have been established, and valuations have normalized, with a pressing need for earnings and fundamental repairs. After the "buy everything" phase ends soon, it is necessary to pay attention to future market trends, fiscal policies, and other economic policy signals.

In terms of layout direction, non-bank finance, consumer goods, and other industries are sectors that many foreign institutions are optimistic about in the short term, while pharmaceuticals and high dividend stocks are areas of long-term interest.Morgan Stanley and several other foreign institutions believe that non-bank financials benefit from increased capital market activities and improved asset performance, suggesting an overweight position in insurance but cautioning against a pullback after short-term overheating in securities firms.

Regarding the consumer sector, Bank of America and Goldman Sachs, among others, believe that the industry is poised to benefit from loose policies, offering structural growth opportunities with relatively reasonable valuation levels, but cautioning against profit-taking if the medium to long-term economic recovery falls short of expectations.

In addition, multiple international institutions believe that the internet benefits from a pro-cyclical logic, and compared to other assets and its own historical peaks, there is still room for valuation.

In the medium to long term, Goldman Sachs believes that policy requirements to increase dividend intentions give high-dividend companies a better defensive attribute.

As the A-share and Hong Kong stock markets adjust, the flow of overseas funds also appears to be switching.

Data from CICC shows that from October 3rd to 9th, inflows into US stocks and emerging markets turned positive. In terms of active foreign capital, the outflow from US stocks, which was $120 million the previous week, turned into an inflow of $910 million, the outflow from Europe narrowed from $2.47 billion to $870 million, the outflow from the Japanese stock market narrowed from $1.13 billion to $230 million, and emerging markets turned from an outflow of $250 million to an inflow of $60 million.

Will global funds continue to flow into China?

"Before this round of increases, the proportion of foreign capital's allocation to A-shares was at a relatively low level in recent years," said Zhang Hao, head of the macro team at Debon Securities. After the Federal Reserve's rate cut, everyone is seeking a global rebalancing. When we start to implement large-scale counter-cyclical policy stimulus, the cost-performance advantage of Chinese assets begins to emerge, and as long as the market rises, foreign capital will also participate.

The aforementioned asset management personnel stated that from the perspective of global fund allocation, stock markets in Japan and other places have already risen significantly. With signs of improvement in the domestic market, the logic of funds returning to A-shares and Hong Kong stocks is established.