This time, domestic capital really wants to seize the "pricing power of Hong Kong stocks"

Mainland investors' enthusiasm for the Hong Kong stock market is unprecedentedly high. Yesterday, the trading volume through the Stock Connect accounted for nearly half of the total trading volume of Hong Kong stocks, with a net buying amount reaching HKD 16.5 billion, the highest level since early December. Shenwan Hongyuan analysts Dong Yi and Wang Sheng stated in their report "Stock Connect Funds: From Quantity Change to Quality Change - One of the New Frameworks for Hong Kong Stock Research: Dissection of Hong Kong Stock Funds & ERP Model Update" that in recent years, the proportion of Stock Connect funds in the overall market trading volume has been continuously rising. Since the fourth quarter of 2024, the proportion of Stock Connect funds in the overall market trading volume has been 20%-25% on most trading days, and the impact of Stock Connect funds on the market can no longer be ignored. Moreover, historically, the valuation and performance of Hong Kong stocks have been greatly influenced by the China-U.S. interest rate differential, but since the fourth quarter of 2023, the influence of this factor has begun to decline, even showing a sustained divergence. In response, Shenwan Hongyuan optimized the Hang Seng Index ERP model to reflect the trend of changes in investor structure and to avoid the impact of short-term extremes on the model: The market risk-free interest rate since the opening of the Stock Connect on November 17, 2014, has been optimized from previously only considering the 10-year U.S. Treasury yield to a weighted average of the 10-year U.S. Treasury and China bond yields, where the weight of the 10-year China bond yield is the moving average of the proportion of Stock Connect funds in the total market trading volume over the past 10 trading days. According to the report, as of February 7, 2025, the implied ERP of the Hang Seng Index after optimizing the cost of funds is 6.73%, which is still some distance from extremely optimistic levels. Currently, the allocation ratio of overseas investors to China is at a relatively low level, and the current capital inflow into the Hong Kong stock market mainly comes from passive funds such as ETFs. In addition, the short-selling ratio in the market has begun to decrease, and the market turnover rate has also rebounded, indicating that trading activity in the market is increasing. Therefore, Shenwan Hongyuan believes that there is still room for further improvement in the liquidity of the Hong Kong stock market, and if a FOMO effect occurs, the stock market's upward momentum may become even more rapid.