The attractive valuation of Hong Kong stock market due to earnings growth and dividend yields as well as the expanded universe of investable companies will propel potential re-rating of Hong Kong equity market in the long term, with consumer, financials, innovation and technology, as well as healthcare stocks in the spotlight, global fund managers reckon.

In June, the value of average daily turnover contributed by southbound funds for exchange-traded funds and stocks traded on Hong Kong Stock Exchange was HK$120.8 billion ($15.48 billion), representing a month-on-month increase of 27.9 percent, according to Hong Kong Exchanges and Clearing (HKEX) data.

UBS estimates southbound net inflows into Hong Kong-based listed companies and H-shares amounted to 684.2 billion yuan ($95.56 billion) in the first half of this year, soaring 101 percent year-on-year, marking a new high. Mainland investors significantly raised their stakes in sectors such as consumer, financials, innovation and technology, as well as healthcare.

James Wang, head of China equity strategy research at UBS, said mainland southbound investors have increased their allocations towards Hong Kong equities (including Hong Kong-based listed companies and H-shares) to as much as 21 percent of free float of Hong Kong stock market.  

“The key factors driving H-shares that we identified, in order of descending importance, are policy and regulations, earnings, innovations, fund flows and interest rates, valuations, macro conditions as well as geopolitics,” Wang noted. “We broadly maintain our preferences for a barbell strategy containing technology on the one hand and high-yield names on the other.”

“According to HKEX data, southbound funds showed a clear preference for technology stocks in the first half of the year. This trend likely reflects investor confidence in the growth potential of AI-related industries, particularly given the limited availability of comparable AI-focused stocks within mainland’s A-share market,” Dah Sing Financial Group Principal Economist and Strategist Gary Wan told China Daily.

ALSO READ: Hong Kong equity market revives on policy, improved outlook

In April, Goldman Sachs significantly raised its 2025 forecast for southbound fund flows under the mainland-Hong Kong stock connect programs, raising the estimate from $75 billion to $110 billion, citing the growing attractiveness of H-share profiles in terms of earnings growth, valuation and dividend yields, as well as the expanded investable universe due to newly listed and home-coming companies.

The attractive valuation of Hong Kong securities market has also drawn the attention of international investors.

JP Morgan Private Bank Executive Director and Equity Strategist Cameron Chui told China Daily that international investors continue to seek secular growth opportunities in companies with technological leadership positions in attractive end markets where valuations remain reasonable compared to global peers, and selectivity remains key.

Chui added: “The communication services sector continues to be favored due to potential AI use cases for better advertising targeting and revenue upside, and there has been a greater focus towards over-capacity industries where speculation of new government policies soon to be introduced to rein in production that could lead to improved profitability.”

But the equity strategist expects international investors may not favor consumer discretionary stocks as this sector is more exposed to the macro headwinds in the mainland with increasingly intensified competition.

With a price-to-earnings ratio at a multiple of 15 as projected by Hong Kong-based mandatory provident fund advisory firm GUM, Value Partners Group expects global active fund managers may narrow their underweight on the Hong Kong market over time, given the attractive valuation level.

Hong Kong’s equity market benchmark Hang Seng Index finished 0.5 percent higher at 25,667 points on a market turnover of HK$294.8 billion on Thursday.

READ MORE: Mainland stocks in Hong Kong rise to highest level in four years

The Hang Seng China Enterprises Index — a barometer of mainland companies — edged up 0.2 percent to finish at 9,257 points, while the city’s technology stock gauge — the Hang Seng TECH Index — was mainly flat at 5,743 points.