On July 28, 2026, data from Hong Kong Exchange showed that as of July 26, the net inflow of Stock Connect (Shanghai + Shenzhen) funds this month reached RMB 83.2 billion, setting a new monthly net inflow high for 2026. At the same time, the latest dividend yield of the Hang Seng Index climbed to 4.2%, the highest level since 2021. Against the backdrop of A-share volatility and high global interest rates, the low valuation and high dividends of Hong Kong stocks are attracting accelerated deployment of Southbound funds, with many institutions shouting that "the allocation value of Hong Kong stocks is prominent."
1. Low Valuation: The "Value Depression" Effect of Hong Kong Stocks is Significant
Currently, the Hang Seng Index has a P/E ratio of only 9.5 times and a P/B ratio of 0.95 times, both at low levels among major global markets. In comparison, the S&P 500 P/E ratio is about 22 times, and the A-share CSI 300 P/E ratio is about 13 times. The discount of Hong Kong stocks relative to global markets exceeds 30%, leaving huge room for valuation repair. A latest report from CICC points out that Hong Kong stock valuations have fully priced in pessimistic expectations, and with China's economic stabilization and corporate earnings improvement, Hong Kong stocks are expected to see dual improvement in valuation and earnings.
2. High Dividends: Strong Attraction of Cash Dividends
The average dividend yield of Hang Seng Index constituent stocks has exceeded 4%, significantly higher than the A-share Shanghai Composite Index (about 2.8%) and the US S&P 500 (about 1.5%). Among them, the dividend yields of banking, energy, and telecommunications sectors are generally above 5%. Against the backdrop of the Fed maintaining high interest rates, the high dividend yield of Hong Kong stocks provides an income structure similar to "bonds + options." Since July, high-dividend stocks such as Bank of China and China Mobile have continued to receive increased positions from Southbound funds.
3. Stock Connect Mechanism: Convenient Cross-Border Investment Channel
Since the launch of Stock Connect, the threshold for mainland investors to allocate Hong Kong stocks has been significantly lowered. Currently, Stock Connect covers about 700 Hong Kong stocks, accounting for over 80% of the main board market value. In July 2026, the turnover of Stock Connect accounted for more than 35% of the total turnover of Hong Kong Exchange for the first time, indicating that mainland funds have become an important force in Hong Kong stocks. Stock Connect also brings a liquidity premium, and some H-shares with high A/H premium ratios have opportunities for convergence.
4. Complementarity with A-shares: Diversify Risk, Enhance Returns
Hong Kong stocks and A-shares differ in industry structure and investor composition. Hong Kong stocks have a higher proportion of new economy sectors such as internet, biomedicine, and new consumption, while A-shares are dominated by finance and manufacturing. Allocating Hong Kong stocks can effectively diversify single-market risk. Historical data shows that the correlation coefficient between Hong Kong stocks and A-shares is about 0.6, and adding Hong Kong stocks to the portfolio can significantly improve the Sharpe ratio.
5. Institutional Views: Allocation Window Has Arrived
Many international investment institutions have recently turned bullish on Hong Kong stocks. Morgan Stanley's strategy team stated that Hong Kong stock valuations have fallen to historically extreme levels, with a probability of rebound exceeding 80% in the next 12 months. Goldman Sachs upgraded its rating on Hong Kong stocks from "neutral" to "overweight," believing that China's policy easing and profit recovery will drive a revaluation of Hong Kong stocks. Domestic mutual funds also generally increased their Hong Kong stock positions in their second-quarter reports, with some funds' allocation to Hong Kong stocks exceeding 30%.
6. Risk Warning and Allocation Suggestions
Although the allocation value is prominent, investors still need to pay attention to the following risks:
- Global macroeconomic uncertainty, especially the pace of Fed policy
- Impact of geopolitical risks on market sentiment
- Liquidity divergence in the Hong Kong stock market, small-cap stocks trade thinly
It is recommended that investors allocate in batches through Stock Connect or Hong Kong stock ETFs, focusing on: first, high-dividend blue chips such as banks and energy; second, high-quality growth stocks with reasonable valuations such as internet and innovative drugs; third, H-shares with large A/H discounts.
Overall, the current low valuation, high dividend yield of Hong Kong stocks, and the continued inflow of Southbound funds form a strong support for allocation. For investors seeking diversification and value reversion, Hong Kong stocks are ushering in a rare window for positioning.
