Southbound Funds Hit Record High in September: Hong Kong Stocks' Low Valuation Attracts Attention, AI and High Dividend Dual Strategy

Continuous Inflow of Southbound Funds, Hong Kong Market Favored by Mainland Capital

In September 2026, the Hong Kong stock market continued to attract sustained attention from Southbound funds. Data shows that the net inflow of Southbound funds reached a new high in the first week of September, indicating growing confidence among mainland investors in the Hong Kong market. This phenomenon is driven by the dual factors of the low valuation advantage of Hong Kong stocks and the global capital return, providing mainland investors with a good opportunity to allocate to Hong Kong stocks.

Southbound funds refer to capital invested in the Hong Kong market by mainland investors through the Stock Connect mechanism. Since the opening of the Shanghai-Hong Kong Stock Connect in 2014 and the expansion of the Shenzhen-Hong Kong Stock Connect in 2016, Southbound funds have become a vital source of incremental capital for the Hong Kong market. Especially since 2022, as the valuation of Hong Kong stocks has continuously declined, Southbound funds have accelerated their inflow, becoming a major supporting force for the market.

September Southbound Fund Inflow Characteristics

According to the latest data, the cumulative net inflow of Southbound funds in the first three weeks of September 2026 exceeded 80 billion HKD, setting a new annual high. The largest weekly net inflow occurred in the second week of September, reaching 25 billion HKD, demonstrating strong interest from mainland investors in the Hong Kong market.

In terms of capital flow, Southbound funds are mainly concentrated in the following sectors:

Tech Stocks: Emerging technology fields such as artificial intelligence and cloud computing have become key allocation targets for Southbound funds.
High Dividend Blue Chips: Traditional industry leaders including banks, energy, and telecommunications.
Consumer Leaders: High-quality enterprises in essential consumption sectors like food and beverage and pharmaceuticals.
New Energy: New energy vehicle industry chain and clean energy related companies.

It is worth noting that the allocation of Southbound funds in the technology stock and high dividend sectors exhibits a clear "dual strategy" characteristic, reflecting the balanced allocation approach of mainland investors between growth and value in the current market environment.

Hong Kong Stocks' Low Valuation Advantage Stands Out, Re-recognized for Allocation Value

The continuous inflow of Southbound funds is underpinned by the sustained display of the valuation advantage of the Hong Kong stock market. Compared to major global markets, the Hong Kong stock market is still at a historically low valuation, and the discount compared to the A-share market is particularly noticeable, offering good allocation opportunities for mainland investors.

From valuation indicators, the Hang Seng Index currently has an P/E ratio of about 9.5 times, which is below the average of the past decade and significantly lower than the approximately 18 times P/E of the US S&P 500 index. In terms of dividend yield, the Hang Seng Index dividend yield is about 4.5%, which is higher than the average of major global markets, demonstrating the investment value of the Hong Kong stock market.

Multiple Factors Behind Low Valuation

There are several reasons why the Hong Kong stock market valuation is low:

Macroeconomic Factors: Slow economic growth in Hong Kong has affected corporate earnings expectations.
Geopolitical Factors: Concerns of international investors regarding Chinese enterprises lead to valuation discounts.
Capital Flow Factors: Global capital allocation strategies, with some funds flowing out of emerging markets.
Structural Factors: The Hong Kong stock market is dominated by traditional industries such as finance and real estate, with relatively low growth potential.

However, these factors are gradually improving, providing space for the valuation repair of the Hong Kong stock market. As the Chinese economy stabilizes and recovers, and the status of Hong Kong as an international financial center is consolidated, the investment value of the Hong Kong stock market is regaining recognition from global investors.

AI and High Dividend Dual Strategy Layout

Against the backdrop of continuous Southbound fund inflow, mainland investors' allocation in the Hong Kong market shows a clear "AI and High Dividend dual strategy" characteristic. This strategy considers both technological growth potential and stable income needs, reflecting a rational investment approach in the current market environment.

AI Sector: The Main Battlefield for Tech Growth

Artificial intelligence, as a core driver leading future development, has become a hotspot in global technology investment. The Hong Kong market hosts many high-quality AI-related enterprises in various fields, including chip design, cloud computing, big data, and autonomous driving. Southbound funds have recently increased their allocation to the AI sector, reflecting mainland investors' optimism about growth stocks.

In terms of specific targets, Southbound funds mainly focus on the following types of AI-related enterprises:

Chip Design Companies: Such as Huawei HiSilicon and SMIC, which have competitive advantages in the AI chip field.
Cloud Computing Service Providers: Such as Alibaba Cloud and Tencent Cloud, providing infrastructure support for AI applications.
AI Application Companies: Such as SenseTime and Megvii, which have leading positions in computer vision and natural language processing.
Smart Driving Companies: Such as Xpeng Motors and Li Auto, which have made breakthroughs in autonomous driving technology.

Analysts point out that although the AI sector has a high short-term valuation, its long-term growth potential is vast, making it suitable for investors with high risk tolerance. The continuous increase in Southbound funds in the AI sector reflects mainland investors' grasp of technological trends and pursuit of long-term value.

High Dividend Sector: A Safe Haven for Stable Income

Corresponding to the high growth of the AI sector, the high dividend sector provides stable income sources for investors. Southbound funds have also been continuously increasing their allocation to the high dividend sector, reflecting the pursuit of stable income in a volatile market environment.

The high dividend sector in the Hong Kong stock market mainly includes the following industries:

Financial Stocks: Especially state-owned large banks and high-quality insurance stocks, with dividend yields generally above 5%.
Energy Stocks: Including utilities like oil and power, which offer stable dividends and clear dividend policies.
Telecom Stocks: Leading stocks such as China Mobile and China Telecom, with high dividend yields and stable businesses.
Real Estate Stocks: Some high-quality commercial real estate stocks, which have high dividend yields and low valuations.

The advantages of allocating to the high dividend sector are mainly reflected in the following aspects:

Stable Income: High dividend companies usually have mature businesses and stable cash flows with clear dividend policies.
Valuation Safety: High dividend sectors generally have low valuations and high safety margins.
Inflation Hedge: Dividend income can partially hedge against inflation risks.
Strong Defense: In economic downturn cycles, high dividend sectors often show strong resilience.

Continuous Optimization of Stock Connect Mechanism, Improved Investment Convenience

The continuous inflow of Southbound funds into the Hong Kong market is inseparable from the continuous improvement and optimization of the Stock Connect mechanism. In recent years, the CSRC and the SFC have continuously promoted the Stock Connect mechanism reform, providing more convenience for mainland investors to invest in Hong Kong stocks.

Expansion of Stock Connect Targets

Since 2026, the Stock Connect targets have been expanded three times, incorporating more high-quality technology enterprises and consumer leaders, offering more choices for mainland investors. The latest expansion list includes new AI-related enterprises and high dividend blue chips, further enriching the investment target pool for Southbound funds.

Trading Mechanism Optimization

In terms of trading mechanisms, Stock Connect has achieved T+0 trading and the removal of price limits, improving market liquidity. Furthermore, the trading volume of Stock Connect has increased, providing institutional support for the continuous inflow of Southbound funds.

Richness of Risk Hedging Tools

With the continuous development of the financial derivatives market, the risk hedging tools available to Stock Connect investors are becoming richer. The introduction of derivatives such as Stock Connect ETFs and options provides investors with more risk management methods, further enhancing the attractiveness of the Hong Kong market.

Investment Strategy Recommendations

Against the backdrop of continuous Southbound fund inflow and the low valuation advantage of Hong Kong stocks, mainland investors can consider the following investment strategies:

Asset Allocation Strategy

For long-term investors, Hong Kong stocks can be an important component of asset allocation, with a suggested allocation ratio between 20% and 30% of the stock portfolio. In terms of specific allocation, a "core-satellite" strategy can be adopted, using high dividend blue chips as the core and AI growth stocks as the satellite, achieving a balance between returns and risks.

Industry Allocation Strategy

In terms of industry allocation, it is recommended to focus on the following major sectors:

Technology Sector: Focus on emerging technologies such as AI, cloud computing, and semiconductors.
Financial Sector: Focus on high dividend financial stocks such as state-owned large banks and high-quality insurance stocks.
Consumer Sector: Focus on leading enterprises in essential consumption fields like food and beverage and pharmaceuticals.
Energy Sector: Focus on utilities like oil and power to obtain stable dividend income.

Choosing Investment Timing

In terms of choosing investment timing, it is recommended to adopt a "buy on dips" strategy, looking for buying opportunities during market adjustments. At the same time, investors can monitor Stock Connect capital flow indicators and increase allocation when Southbound funds are continuously flowing in.

Risk Management Strategy

In terms of risk management, investors are advised to:

Diversify Investments: Avoid concentration risks in single stocks or industries.
Control Positions: Reasonably control positions based on one's own risk tolerance.
Regular Rebalancing: Regularly adjust asset allocation to maintain risk-return balance.
Utilize Derivatives: Appropriately use derivatives such as options for risk management.

Conclusion

In September 2026, Southbound funds continued to boost the Hong Kong market, achieving a new high in net inflow, reflecting mainland investors' recognition of the allocation value of Hong Kong stocks. Driven by the dual factors of low valuation and global capital return, the Hong Kong market is entering a new round of allocation opportunities.

From an investment logic perspective, the AI and High Dividend dual strategy has become the main allocation idea for Southbound funds, grasping technological growth trends while also considering stable income needs. With the continuous optimization of the Stock Connect mechanism and the increasing internationalization needs of mainland investors, Southbound funds are expected to remain a vital source of incremental capital for the Hong Kong market.

For mainland investors, the Hong Kong market offers multiple advantages, including low valuation, high dividends, and internationalization, making it an important part of asset allocation. During the investment process, investors are advised to combine their own risk tolerance and adopt a scientific asset allocation strategy to seize investment opportunities in the Hong Kong market.

Looking ahead, as the Chinese economy stabilizes and recovers and the status of Hong Kong as an international financial center is consolidated, the Hong Kong market is expected to see valuation repair and structural trends, creating long-term value returns for investors.