In the first half of 2026, global financial markets were marked by volatility and uncertainty, presenting both opportunities and risks—the emergence of major events such as the U.S.-Iran conflict, Kevin Warsh assuming the role of Federal Reserve Chair, and SpaceX completing the largest IPO in history has been relentless. Fellow investors are not only participants in the market but also witnesses to this era.
Looking back, we draw on past experience—may all our efforts in the first half of the year lay the groundwork for pleasant surprises in the second half.
Looking back at the first half of the year, Hong Kong equities overall exhibited a volatile downward trend. As of the close on June 30, $Hang Seng Index (800000.HK)$ it had declined by 10.73% cumulatively; $Hang Seng TECH Index (800700.HK)$ fell by 18.92%; $Hang Seng China Enterprises Index (800100.HK)$ dropped by 15.21%.
Amid the dual influence of the global AI boom and shifting macroeconomic conditions, southbound capital—which has served as a key source of incremental funding supporting Hong Kong equities in recent years—saw a marked slowdown in inflows during the first half of the year. However, funds did not withdraw entirely; instead, their allocation focus shifted significantly from internet and consumer sectors toward AI-related 'hard tech' segments such as semiconductors, PCBs, and domestic large AI models.
Investor enthusiasm for southbound capital notably cooled in the first half of the year.
Data show that as of the close on June 30, net southbound inflows totaled approximately HK$301.043 billion in the first half of the year, a significant deceleration compared to HK$731.193 billion during the same period in 2025, representing a year-on-year decline of nearly 60%.
In terms of timing, southbound capital flows displayed a clear 'front-loaded' pattern. At the beginning of the year, catalyzed by domestic large AI models such as DeepSeek, southbound capital surged into the market, driving the Hang Seng Tech Index to a short-term peak in February. The first quarter thus emerged as the main driver of net inflows, contributing nearly HK$200 billion—approximately 74% of the total for the first half of the year.
However, with repeated shifts in expectations regarding Federal Reserve rate cuts and other factors, Hong Kong equities entered a volatile downtrend in the second quarter, leading to a sharp contraction in liquidity. In May alone, net outflows exceeded HK$3.5 billion—the first monthly net outflow since June 2023.
AI-related 'hard tech' sectors such as semiconductors gained favor among investors.
Although overall capital flows have slowed, southbound capital has shown clear structural preferences in sector allocation. Traditionally overweighted internet stocks have underperformed the market, triggering active selling of some holdings, while AI-related 'hard tech' sectors such as semiconductors and PCBs have become key focus areas for capital deployment.
Among the top individual stocks attracting southbound inflows in the first half of the year, certain technology and internet stocks remained the most favored for increased positions. Notably, $TENCENT (00700.HK)$received additional southbound investments exceeding HK$35.3 billion, ranking first across the entire market in terms of southbound fund inflows. $XIAOMI-W (01810.HK)$ 、 $KUAISHOU-W (01024.HK)$ received southbound capital additions of approximately HK$21.1 billion and HK$8.7 billion, respectively.
In the second quarter, $SMIC (00981.HK)$ 、 $KINGBOARD HLDG (00148.HK)$ 、 $KB LAMINATES (01888.HK)$ and $KNOWLEDGE ATLAS (02513.HK)$ 、 $HUA HONG GRACE (01347.HK)$five companies along the AI supply chain were particularly attractive to investors, receiving net southbound purchases of over HK$23.3 billion, HK$20.3 billion, HK$20.0 billion, HK$6.5 billion, and HK$6.1 billion, respectively, in the first half of the year—totaling more than HK$76 billion, or roughly one-quarter of total southbound inflows for the year.
On the other hand, signs of selling also emerged among technology and internet stocks. As the most favored stock by southbound capital in 2025, $BABA-W (09988.HK)$became a primary target for position reductions in the first half of the year, with net sales exceeding HK$32.4 billion. Particularly in the second quarter, as Alibaba’s share price continued to decline, investors executed broad-based portfolio reallocations and exits; in the past three months alone, net sales of Alibaba shares surpassed HK$37.4 billion.
Notably, despite strong share price performance in the first half of the year, AI hardware stocks $YOFC (06869.HK)$ 、 $LENOVO GROUP (00992.HK)$ faced net sales of over HK$3.3 billion and HK$0.7 billion, respectively, indicating that amid heightened market volatility, investors engaged in significant profit-taking and portfolio rebalancing.
Although the pace of southbound capital inflows has markedly slowed in the first half of the year, it continues to flow into Hong Kong-listed stocks. To date, cumulative net inflows since the launch of Stock Connect have exceeded HK$5.4 trillion, and a net buying record is expected to be maintained for the 12th consecutive full calendar year since its inception.
Most institutions project that total southbound capital inflows for the full year will reach approximately HK$550–650 billion. While this is significantly below the record high of over HK$1.4 trillion in net purchases seen in 2025, it will still represent the largest source of incremental funding for the Hong Kong equity market.
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Editor/rice