The recent upturn in Hong Kong's Hang Seng Tech Index has captured the attention of investors globally. Since hitting a low point in mid-January, the index has soared by over 33%, outpacing the major indices of both A-shares and US stocks. On February 18, shares of Tencent Holdings reached HKD 513 per share, breaking a three-year record and signifying a robust comeback. Similarly, other major internet firms like Alibaba and Kuaishou have also recorded significant gains and reached milestone highs recently.

This resurgence follows a notable shift in investment strategy among both domestic and foreign investors. What was once a focus on short-term trading opportunities has transitioned to a more patient, strategic approach based on long-term asset allocations. Investors have moved from a cautiously optimistic stance to casting “trust votes” in the market, indicating a rising confidence in the potential growth of tech stocks in Hong Kong. The consensus also seems to lean towards a gradual buildup of positions in the market, with a quiet accumulation of undervalued assets.

Driving this optimism are policy dividends and technological advancements that are encouraging global capital to reassess the Chinese tech sector. Financial giants such as Goldman Sachs, BlackRock, and UBS are all advocating for a bullish outlook on Chinese tech assets, suggesting that they are poised to transition from being undervalued to becoming innovation hotspots. However, caution remains warranted as the booming market has led to overheated trading conditions, exerting additional pressures on the overall indices.

Experts in the field assert that the application of AI technology will significantly enhance the profit margins for Chinese tech stocks. This means that internet companies in Hong Kong could be on the brink of structural opportunities, although there exists a risk of a short-term correction following the rapid ascent of tech shares. Key variables to monitor moving forward include the evolution of international geopolitical scenarios, earnings reports from internet firms, and interest rate trends set by the US Federal Reserve.

In terms of foreign investment, there has been a record influx into the Hong Kong stock market, particularly concerning US-listed Chinese tech stocks. As of February 7, 2024, data indicates substantial net inflows into the KraneShares CSI China Internet ETF (KWEB), which amounted to USD 470 million within a single week, marking the highest rate since early October. This is just a part of a broader trend where more than HKD 13 billion has been funneled back into the Hong Kong markets since January 24, according to statistics from CITIC Securities.

On February 18 alone, there was an additional influx of HKD 22.623 billion from southern capital directed toward the Hong Kong stock market. This year has already seen an impressive total net inflow of HKD 185.584 billion, with HKD 125.592 billion of that coming in January alone, representing a peak that hasn't been seen in 47 months.

Recent data highlights that southern capital has predominantly increased its stakes in tech firms. Over just a month, the top five companies accumulating the most from this capital influx include Tencent Holdings, Alibaba-W, Xiaomi Group-W, Industrial and Commercial Bank of China (ICBC), and Semiconductor Manufacturing International Corporation (SMIC), with capital increases of HKD 112.74 billion, HKD 48.28 billion, HKD 39.73 billion, HKD 31.02 billion, and HKD 24.3 billion, respectively.

Goldman Sachs' latest research suggests that as global capital markets converge around a shared understanding of AI’s potential, there has been substantial buying activity among global hedge funds targeting Chinese equities this year. Furthermore, data through February 7 shows that within Goldman’s global prime brokerage business, both onshore and offshore Chinese stocks constitute the largest nominal net buyer market of the year. Over the past month, these hedge funds have collectively driven an increase in total market capitalization exceeding USD 1.3 trillion (approximately RMB 9.43 trillion).

As the Hong Kong tech sector approaches a peak in its performance, some indicators suggest a potential for short-term overtrading. China International Capital Corporation (CICC) has noted that the market sentiment is nearing the high points seen in early May 2024, with technical indicators approaching the levels of being overbought. For example, on February 17, the number of shares sold short for Tencent Holdings increased drastically to 15.176 million shares—significantly more than the 4.89 million shares recorded on January 13.

The ongoing market rally for Hong Kong stocks has predominantly been propelled by the ongoing reevaluation of tech stock valuations, largely inspired by the continued excitement around AI technologies. The concept of AI has been gaining traction, leading both domestic and foreign capital to rethink the worth of tech assets. According to UBS’s head of China Internet research, Fang Jincong, while a short-term correction may occur for both A-shares and Hong Kong stocks engaged in the AI sector, there remains substantial upward potential overall. This potential is underpinned by ongoing technological advancements that enhance operational efficiencies, pointing to structural growth opportunities for Chinese internet firms.

According to Liu Gang, a strategy analyst at CICC, the primary catalyst behind the current surge in Hong Kong stock prices can be traced back to the profound shift in perceptions spurred by DeepSeek's innovative breakthroughs, prompting a reevaluation of the tech sector and overall Chinese assets. This market upheaval mirrors the substantial rebounds observed in late September of the previous year, which were largely driven by transactional inflows. If developments within the AI industry continue to reinforce themselves with clear paths toward commercialization, potential structural market rallies may still prevail, even amidst fluctuations in the broader Hong Kong stock market.

An analyst from a foreign TMT institution predicts that the upward momentum for the Hang Seng Tech sector will gradually pivot from being fueled predominantly by AI concepts to a revised focus on earning expectations at the micro level for listed companies. As investors navigate this complex landscape, the evolving dynamics surrounding tech markets will undoubtedly remain a focal point of interest and analysis in the months ahead.