Hong Kong stocks fall, but Hang Seng Tech ETF shares surge as investors buy the dip

Hong Kong stocks closed lower on September 25, dampening the Mid-Autumn Festival holiday mood for many A-share investors enjoying a rare break. The Hang Seng Index fell 1.01%, and the Hang Seng Tech Index dropped 1.13%, adding to investor concerns.

Since the start of September alone, the Hang Seng Tech Index has fallen over 6%. However, in a striking contrast, Hang Seng Tech ETFs have seen massive inflows, with several products recording share-count increases of billions in a single month, even as the broader market sentiment remains weak.

Why are investors stubbornly "buying the dip" while the index has fallen back to square one?

Investors "Rise to the Challenge" with Hang Seng Tech ETFs

The Hang Seng Tech Index has seen a notable pullback recently, erasing the gains from a six-week rally that began in late June. Over a longer timeframe, the index has slowly fallen back to levels seen two years ago, effectively returning to its starting point after a roller-coaster ride.

Despite this, investor enthusiasm remains high. In September, even as the Hang Seng Tech Index fell over 6.67%, the scale of several thematic products continued to rise steadily.

According to data:

• China Asset Management's Hang Seng Internet & Technology ETF saw its share count surge by 5.176 billion shares in September.
• Huatai-PineBridge Hang Seng Tech ETF added over 4 billion shares.
• China Asset Management Hang Seng Tech ETF and Dacheng Hang Seng Tech ETF each saw share-count increases of over 1.1 billion shares.

E Fund Management attributed the recent adjustment to rising U.S. energy prices, which have pushed up inflation expectations and led to a rapid repricing of Fed rate hike expectations. The 10-year U.S. Treasury yield briefly approached 5%, putting significant valuation pressure on long-duration assets like Hong Kong tech stocks. E Fund noted that the current adjustment is more a result of concentrated shocks to overseas liquidity and risk appetite. If rate hike expectations do not rise further, tech assets previously suppressed by higher rates may have some room for valuation recovery.

"As net asset values decline, many investors choose to add positions rather than cut losses, so previous capital has been locked in," said a channel source at a public fund in East China. He pointed out that retail investors are widely adopting a "grid trading" style of dollar-cost averaging—adding to positions each time the ETF's NAV falls by a preset increment—which directly boosts ETF on-exchange share counts.

Another research report noted that stock ETF inflows are negatively correlated with market volatility. The primary reason is that ETF returns inherently depend on expectations of market or index upside. Therefore, when the market falls, the investment cost-effectiveness gradually improves, creating this negative correlation. Additionally, ETFs are becoming more widely accepted by investors, especially in a fast-rotating, directionless market where passive investment concepts are gaining traction.

Public Funds: "Cheap" Doesn't Mean Buy Now

The willingness of capital to "catch a falling knife" on the left side is largely driven by the extreme cost-effectiveness created by the sell-off.

Data shows that, on a comparative basis, the Hang Seng Internet & Technology Index has a PE-TTM of 23.21x, lower than the ChiNext Index's 37x and the STAR 50 Index's 133x over the same period.

Beyond valuation discounts, positive fundamental signals are also quietly accumulating. "When looking at Hong Kong internet stocks now, you can't just focus on short-term price fluctuations," said a public fund source in North China. He noted that the core concern previously was the increasing investment in AI without a clear timeline for revenue generation. However, based on Q2 data, at least some internet companies are beginning to show clearer revenue clues from AI commercialization.

Overall, the Hong Kong internet sector is in a phase of confirming a profit bottom, valuation pullback, and a gradual inflection point in AI revenue. Short-term market volatility may persist, but after the recent adjustment, some positive changes have emerged. The fund manager believes that after this round of correction, Hong Kong internet stocks are showing early signs of AI revenue and a profit bottom, while valuations have returned to relatively low levels—likely one reason for the recent contrarian capital inflows.

GF Fund believes that with marginal improvements in earnings expectations, Hong Kong tech stocks have significant room for a rebound. Current valuation percentiles and trading congestion for Hong Kong tech are not high. Previously, earnings expectations for heavyweight Hong Kong tech stocks were revised down due to headwinds like the food delivery price war. However, the latest financial reports show that revenue and profit growth for some companies have stabilized, and AI businesses have become a new growth engine. As the AI industry trend improves and application commercialization accelerates, earnings expectations are likely to see marginal improvement, making the medium-term elasticity of Hong Kong tech earnings and stock prices worth watching.

However, despite the appeal of "cheap" valuations, don't rush in just yet.

A fund manager in East China overseeing a Hang Seng Tech thematic fund commented: "My judgment is that the left side has moved, but the right side is not yet clear—the factors supporting a Hang Seng Tech rally are accumulating, which is a medium- to long-term fundamental support, not a one-day event." He also warned of risks: "In the short term, it's still too early to call a reversal. The right-side trend signal hasn't emerged yet, and the market remains divided on 'burning cash for the future.' Moreover, global AI crowding is high. If U.S. tech stocks correct, Hong Kong tech will find it hard to stay immune."

Disclaimer: All content in this column is for reference only and does not constitute investment advice. Investing involves risk. Please exercise caution.

Proofread by Wang Chaoquan