Broker: CGS International
Date of Report: July 24, 2025

Favorable Liquidity and Fund Rotation Set to Power Hong Kong Market Momentum in 2025

Introduction: Robust Liquidity Conditions Support Market Uptrend

Hong Kong’s equity market is riding a wave of favorable liquidity conditions, setting the stage for continued momentum through 2025. Southbound inflows remain a cornerstone of market liquidity, while signs of renewed interest from passive funds and a persistent low-rate environment further underpin the market’s strength.

Southbound Inflows: The Key Driver of Hong Kong Market Liquidity

– Average daily net inflows via Stock Connect surged to HK\$4.1bn in July 2025 (up to July 23), marking a significant rise from HK\$2.4bn in May and HK\$4.0bn in June. – Year-to-date cumulative net southbound inflows have reached HK\$796.1bn, nearly matching the full-year figure for 2024 of HK\$807.9bn. – Southbound trading activity accelerated, with daily turnover hitting HK\$140.2bn in July, compared to HK\$94.5bn in May and HK\$120.8bn in June. This is just shy of the February 2025 record of HK\$145.8bn. – The contribution of southbound trading to overall market turnover hit an all-time high of 55.5% in July 2025.
Passive funds are showing renewed interest, with major US-listed China-centric ETFs (e.g., KWEB) recording net inflows last week amid easing US-China trade tensions.

Liquidity Outlook: Low-Rate Environment Remains Supportive

– Despite the Hong Kong Monetary Authority (HKMA) initiating liquidity withdrawals in late June, Hibor remains low. – The aggregate balance, a measure of banking system liquidity, soared to HK\$174.1bn in early May (from HK\$45.1bn at end-April) after HKMA’s injection, before falling to HK\$86.4bn by July 23. This means 68% of the injected liquidity has been withdrawn. – 1-month Hibor has only slightly increased, from 0.59% at end-May to 0.90% currently, keeping the HKD-USD interest rate gap elevated at ~340 basis points. – This large differential incentivizes carry trades, which keeps the HKD near the weak end of its trading band, and may require the HKMA to drain more liquidity in the future. – Historically, persistent interest rate gaps have lasted for extended periods, suggesting the low-rate environment could persist and continue supporting equities.

Sector Divergence and Opportunities for Fund Rotation

– The Hang Seng Index has rebounded to its March 2025 peak, while the Hang Seng TECH Index is still 5.9% below its March high. – Sector divergence is notable: Biotech has outperformed, while Retailing (Alibaba, JD.com, Meituan) and Consumer Services (catering, education) have underperformed. – Investors are concerned about weak household consumption and fierce competition in e-commerce platforms. – Amid ample liquidity, policy catalysts and a search for laggards could drive significant fund rotation.

Top Sector and Stock Picks for 2025: Detailed Analysis

Catering and Smartphone Supply Chain

• Yum China (Add, Target Price: HK\$459.0, Current Price: HK\$383.2) – Attractive among catering names.
• BYD Electronics (Add, TP: HK\$46.8, CP: HK\$33.6) and AAC Tech (Add, TP: HK\$63.0, CP: HK\$39.3) – Both are favored within the smartphone supply chain.

“Anti-Involution” Regulatory Beneficiaries

• Alibaba (Add, TP: HK\$153.0, CP: HK\$120.9)
• Meituan (Add, TP: HK\$161.0, CP: HK\$133.2)
• XPeng (Add, TP: HK\$123.8, CP: HK\$74.1)

Regulatory measures supporting food delivery, instant delivery, and the new energy vehicle sector are expected to drive significant upside for these names.

Insurance and “Soft Tech” Valuation Upside

– Even within outperforming sectors, insurance and “soft tech” (games, short videos, music streaming, AI applications) are seen as undervalued and offer near-term upside.

High Conviction Stock List: 2025 Targets and Financials

Biotech Sector: Remain Positive Despite Strong YTD Performance

– Investors are advised to retain exposure to large-cap biotech names with breakeven prospects in FY25-26, such as BeOne (BeiGene), and those with catalysts from 2H25 out-licensing deals.

Sector Performance Snapshot

– Year-to-date, biotech, materials, and IT have led gains within MSCI China, while retailing and consumer services have lagged. – Since the March 2025 high, biotech and materials remain strong, while retailing and consumer services continue to underperform.

Conclusion: Positioning for Opportunity Amid Supportive Conditions

The Hong Kong market is set to benefit from sustained liquidity, robust southbound inflows, a supportive low-rate environment, and ongoing fund rotation. Investors should focus on laggards poised for recovery and high-conviction names across catering, tech, fintech, insurance, and biotech sectors to maximize upside potential as market dynamics shift in the second half of 2025.