Behind HK Stocks' Independent Rally: Signals of Foreign Capital and QDII Position Replenishment

Introduction

During the 2026 "May Day" holiday, the HK stock market exhibited strong upward momentum despite the absence of A-share funds and Shanghai-Hong Kong-Shenzhen funds. This phenomenon broke the previous pattern where HK fund heavy stocks were highly dependent on southbound capital, sparking widespread discussion about changes in capital structure. When mainland investors suspended trading due to the holiday, the independent rally of HK stocks suggested that foreign institutions and QDII funds were accelerating position replenishment. This is not only a repricing of the HK stock valuation trough but may also indicate an important turning point in global capital flows.

Loosening of the Dependency Pattern: From A-Share Capital to Diversified Forces

For a long time, the activity of HK fund heavy stocks was highly dependent on southbound capital from A-share funds and Shanghai-Hong Kong-Shenzhen funds. Data shows that on most trading days, southbound capital contributed 20% to 30% of the trading volume of Stock Connect targets, and liquidity in some hot sectors like tech and healthcare was almost dominated by mainland capital. This single marginal force dependency made HK stocks vulnerable to A-share market sentiment and capital flows. For example, when A-shares adjusted or regulatory policies tightened, HK heavy stocks often came under pressure simultaneously.

However, the market performance during the 2026 May Day holiday broke this inertia. With A-shares closed and Shanghai-Hong Kong-Shenzhen Stock Connect suspended, the Hang Seng Index and H-shares Index extended their pre-holiday rebound momentum. While trading volume shrank, the proportion of individual stocks rising actually increased. Notably, some heavyweight HK fund heavy stocks such as Tencent, Meituan, and China Mobile still saw significant gains without mainland capital. This indicates that the source of funds for HK stocks is shifting from single marginal dependence to diversified support.

Behind the Independent Rally: Foreign Capital and QDII Position Replenishment

The chart above shows the price trend of HK stocks before and after the holiday, clearly indicating that HK stocks maintained an upward channel during the A-share closure. From a capital flow perspective, the main incremental forces during the holiday came from two directions:

First, large-scale replenishment by foreign institutions. Previously, affected by the US rate hike cycle and geopolitical risks, global asset managers' allocation to HK stocks once fell to historical lows. As expectations of a Fed rate hike peak and China's economic recovery signals strengthen, the appeal of HK stocks as a global value trough has increased again. Recently, several international investment banks have published reports upgrading HK stock ratings from "underweight" to "neutral" or "overweight," and have begun actively buying previously oversold tech and consumer leaders. This replenishment was particularly evident during the holiday because foreign capital is not restricted by A-share holidays and tends to use less liquid time windows to build positions and reduce impact costs.

Second, rapid position increase by QDII funds. As domestic public funds' investment quotas for HK stocks continue to expand, QDII funds have become an important supplement to southbound capital. Unlike Shanghai-Hong Kong-Shenzhen funds that are restricted by holiday trading rules, QDII funds' overseas direct trading channels can still operate during holidays. Some fund managers bullish on HK stocks chose to increase positions during the holiday to lock in low-cost chips before foreign capital returns. Data shows that during the holiday, the net value of several HK-themed QDII funds was estimated to have risen over 3%, far exceeding the average market rise of their holdings, implying active fund addition.

Market Implications and Investment Insights

This phenomenon offers at least three implications for investors:

First, the capital structure of HK stocks is undergoing a qualitative change. The past single-pole driving model reliant on A-share funds is transforming into a multi-pole model involving foreign capital, QDII, and domestic institutions. This helps reduce the systemic volatility of HK stocks and enhance their market independence. When short-term liquidity contraction occurs in A-shares, HK stocks no longer necessarily follow downward.

Second, the valuation repair rally has a sustainable basis. The replenishment by foreign capital and QDII is not a short-term game but based on medium-term valuation repair logic. The current Hang Seng Index P/E ratio is still below its historical average and has a significant premium gap compared to US stocks and A-shares. As global capital rebalances, HK stocks are expected to see sustained incremental allocation.

Third, pay attention to structural opportunities brought by marginal capital changes. During the holiday, the targets favored by foreign capital were concentrated in new economy sectors such as internet, biotech, and new energy. These sectors were previously constrained by the concentration of southbound capital and were more volatile. With foreign capital returning, the pricing power of these sectors will tend to balance, valuation volatility may decline, and long-term investment value becomes prominent.

Conclusion

The independent rally of HK stocks during the May Day holiday is a microcosm of the change in market capital structure. It shows that HK stocks are no longer just a "satellite" of A-share funds but are gradually becoming an important part of global capital allocation. The replenishment of positions by foreign institutions and QDII funds is reshaping the underlying logic of HK stock liquidity. For investors, identifying this trend and adjusting their cognitive framework for HK stock funding sources will be key to grasping the next phase of investment opportunities. When external intervention breaks old dependencies, new balances often breed greater possibilities.