I. Overall Market Performance: A Leading Bull Market Globally
Since 2025, the Hong Kong stock market has emerged as a focal point for global capital with unexpectedly strong performance. As of July 25, the Hang Seng Index has risen 27.08% year-to-date, while the Hang Seng Tech Index has gained 26.56%, both ranking among the top performers in major global markets. In the first half of the year, the Hang Seng Index climbed 20%, and the Hang Seng Tech Index rose 18.68%. Market activity has surged significantly, with average daily turnover reaching HK$242.298 billion, a 123% increase from the same period last year, hitting a record high.
The market's robust performance stems from the convergence of multiple positive factors. Firstly, valuation advantages are prominent: the Hang Seng Index's PE (TTM) stands at 12.07 times, at the 66.9% percentile over the past decade, while its PB (0.91 times) remains at a historical low of 11.96%, presenting a pattern of "overall recovery with localized value depressions." Secondly, favorable policy conditions: Hong Kong has strengthened its position as an international financial center through reforms such as the Stablecoin Bill and optimized trading systems (e.g., technical preparations for a T+1 settlement cycle). Additionally, the upgraded connectivity mechanisms between the Chinese mainland and Hong Kong, including lower investment thresholds for Stock Connect programs, have further attracted capital inflows.
II. Capital Flows: Dual Drivers of Southbound Dominance and Foreign Capital Return
Record Southbound Capital Inflows
As of July 29, cumulative net inflows of southbound capital reached over HK$840 billion year-to-date, surpassing the full-year 2024 figure of HK$80.79 billion, setting a new high since the launch of the Stock Connect mechanism. The proportion of southbound capital in total Hong Kong stock turnover has risen from an average of 17.8% in 2024 to 23.2% so far in 2025, with growing pricing power in sectors such as consumer and dividend stocks. Institutional capital leads the charge: public funds, insurance funds, and others are accelerating allocations to scarce assets like technology, pharmaceuticals, and high-dividend stocks via Stock Connect, with full-year net inflows expected to exceed HK$1 trillion.
Foreign Capital Returning to Hong Kong Markets
After three consecutive years of net outflows, foreign capital is gradually returning. EPFR data shows that as of July 16, 2025, US$9.58 billion in overseas capital has flowed into Hong Kong stocks year-to-date. Amid a weak US dollar cycle, global capital is seeking higher returns, and Hong Kong stocks, with their low valuations and linkages to the mainland economy, have become a key destination for capital spillover.
III. Sector Dynamics: Structural Opportunities and Divergent Patterns
Technology Sector: AI-Driven Earnings Growth
Constituents of the Hang Seng Tech Index, such as Tencent Holdings and Alibaba-W, have performed prominently. Tencent’s Q2 2025 revenue reached RMB184.504 billion, with post-tax profits of RMB56.044 billion, an 8.8% year-on-year increase, driven significantly by AI-powered advertising and cloud services. Alibaba’s cloud business revenue grew 7% year-on-year, with AI-related product revenue increasing by triple digits for five consecutive quarters. Moreover, Hong Kong tech stocks remain attractively valued: the Hang Seng Tech Index’s PE (TTM) is 21.58 times, a 33% discount to the Nasdaq 100 Index.
Innovative Pharmaceuticals: Policy Dividends and Accelerated Internationalization
Reforms to Hong Kong Exchanges and Clearing’s (HKEX) listing rules (e.g., Chapters 18A and 18C) have attracted high-quality pharmaceutical companies. For example, Dongyangguang Pharmaceutical listed through a merger, licensing its innovative drug HEC88473 overseas for nearly US$1 billion, while pipelines like Efinidone demonstrate "Best-in-Class" potential. Policy-wise, Measures to Support High-Quality Development of Innovative Drugs have optimized the medical insurance negotiation mechanism, promoting overseas expansion of pharmaceutical companies. In the first half of 2025, the value of China’s innovative drug BD (business development) deals overseas hit a record high, driving a dual recovery in valuations and earnings for Hong Kong’s innovative pharmaceutical sector.
New Consumption: Emotional Value Driving Differentiated Growth
Hong Kong stocks host A-share-scarce leaders in niche segments like trendy toys and new tea beverages. Naixue’s Tea achieved a 48% surge in per-store profits through store optimization (PRO stores accounting for 80% of total), with average customer spending rising to RMB58. Pop Mart, leveraging IP globalization and product innovation, has seen significant stock price gains, with a PE (TTM) of 106.28 times, reflecting market confidence in its long-term growth.
High Dividends: Low-Volatility Returns Through Cycles
The Hang Seng Stock Connect High Dividend Index offers a 7.79% dividend yield, significantly higher than the A-share Dividend Index (5.73%) and 10-year government bond yields (1.66%). Central state-owned enterprises like China Mobile and China Construction Bank, with stable cash flows and high payouts, have become top picks for long-term funds such as insurance capital. In the first half of 2025, over 70 Hong Kong-listed companies announced interim dividends totaling over HK$50 billion, with HSBC Holdings and CATL among the top contributors.
I. Policy and Institutional Reforms: Enhancing Market Efficiency and Attractiveness
II.
Trading System Reforms
HKEX plans to complete technical preparations for a T+1 settlement cycle by the end of 2025, reducing investors’ capital lock-up time and improving market efficiency and liquidity. Aligning with global trends (e.g., the US has already implemented T+1), this reform will strengthen Hong Kong’s appeal to international capital.
Listing Rule Optimizations
The "Technology Enterprise Express Lane" has attracted hard tech companies like SMIC to list. Hong Kong’s IPO fundraising reached HK$122.9 billion in 2025, ranking first globally, with significant gains from new listings. Additionally, innovative listing models, such as Dongyangguang Pharmaceutical’s merger, have enriched the market’s asset structure.
Upgraded Interconnectivity Mechanisms
Expanded coverage and lower thresholds for Stock Connect programs between the mainland and Hong Kong have deepened integration of capital markets. Five Hong Kong cooperation measures announced in April 2024, including expanding ETF inclusion, have brought incremental capital to Hong Kong stocks.
V. Future Outlook and Risk Warnings
Sustained Core Drivers
Valuation Recovery Potential: Overall Hong Kong stock valuations remain lower than major global markets, with tech and pharmaceutical sectors showing significant divergence between earnings growth and valuations, creating potential for a "Davis double play."
Policy Dividends: Expectations of Federal Reserve rate cuts (75-100 basis points projected for 2025) and mainland economic recovery (5.2% YoY Q2 GDP growth) will further boost market confidence.
Continued Capital Inflows: Strong demand for southbound allocations and sustained foreign capital return are likely to keep full-year net inflows at high levels.
Risk Factors
External Liquidity Shocks: A rebound in US CPI above 3% could push up Treasury yields, suppressing valuations. The current 10-year Treasury yield of 4.41% (at the 20% percentile over five years) faces upside risks.
Widening Sector Divergence: New consumption stocks like Pop Mart (87x PE) may see short-term gains outpace fundamentals; delayed clinical progress for some pharmaceutical firms could trigger corrections.
Policy Game Risks: Escalated US-China trade frictions could impact tech stock earnings, though markets have largely priced in such risks.
VI. Investment Strategy Recommendations
Offensive Positioning: Overweight technology (AI computing power, semiconductors) and new consumption (trendy toys, tea beverage globalization), capturing 19%+ earnings growth and global expansion dividends. Key picks include Tencent Holdings (AI advertising monetization), SMIC (mature process cost advantages), and Pop Mart (IP globalization).
Defensive Positioning: Allocate to high dividends (utilities, banks) and pharmaceuticals (innovative drug internationalization), hedging volatility with 7.8% dividend yields and 50%+ upside potential. China Mobile and CSPC Pharmaceutical offer policy support and cash flow stability.
Long-Term Allocation: Use ETFs to target undervalued assets, such as Harvest CSI HKEX Tech ETF and CSOP Hong Kong Stock Connect Innovative Pharma ETF, to diversify risks and capture sector rotation opportunities.