China Galaxy Securities: Realigning non-US assets internally, Hong Kong stock market's safe-haven properties are attractive.

China Galaxy Securities released a research report stating that against the backdrop of global non-US assets coming under pressure, Hong Kong stocks rose against the trend by 1.45% on March 16th. This seems contradictory to the macro narrative of non-US assets under pressure, but actually reveals funds seeking a "safe haven" and reallocating within non-US assets. Hong Kong stocks' low valuation usually comes with a high dividend yield, making it very attractive to risk-averse funds seeking stable cash flow. Looking ahead to the next six months, consumer discretionary is the strongest sector in terms of performance and profitability among all sectors of Hong Kong stocks, while the financial sector has ample safety margin. The technology sector demonstrates a dual nature in this turmoil. Key points from China Galaxy Securities: The US-Iran conflict has a significant impact on global markets. If the conflict between the US and Iran becomes prolonged, while the Strait of Hormuz remains nominally open, the security risks rise significantly, resulting in a rise in the "geopolitical risk premium" in energy markets. Oil price centers will move higher and oscillate at high levels, thereby pushing up logistics and operating costs, inhibiting a fall in global inflation. The pace of interest rate cuts by major central banks will be delayed and may even consider rate hikes in some cases. The global economy will exhibit a pattern of low growth, high interest rates, and sticky inflation. The simultaneous tightening of global monetary environment will further compress the policy space of various countries. The US dollar will strengthen, putting pressure on non-US currency countries, resulting in a flow of funds back into US dollar assets. The central point of global interest rates will move higher, suppressing the valuation of equity assets and putting pressure on non-US assets. Against the backdrop of global non-US assets coming under pressure, Hong Kong stocks rose against the trend by 1.45% on March 16th. This seemingly contradictory macro narrative of non-US assets under pressure actually reveals funds seeking a "safe haven" and reallocating within non-US assets. Is there a significant change in Southbound funds? From February 27th to March 13th, the value of shares held by international intermediaries decreased by approximately HK$70 billion, directly reflecting the withdrawal of international funds, especially European and American active funds, due to the need for global risk aversion or replenishment of US dollar liquidity, choosing to temporarily exit the Hong Kong stock market. The mainland funds' proportion of total market value through the Stock Connect increased from 10.88% to 10.92%. This coincides with the historic record net purchase of HK$32.994 billion by Southbound funds on March 9th. This counter-cyclical increase in holdings indicates that Southbound funds played a stabilizing role in the market during this adjustment. Is there a seesaw effect in international liquidity? On March 16th, Southbound funds net sold HK$1.101 billion, while foreign funds flowing into the Japanese stock market on March 17th amounted to HK$2.443 billion, down 84.11% from February 25th, 2026. Despite the net outflow of Southbound funds, the Hang Seng Index continued to rise strongly, directly proving that foreign funds were the main driver of the rebound in Hong Kong stocks that day. Some of these funds may come from Middle Eastern financial markets like Dubai, urgently seeking a secure "safe haven," while some funds may come from foreign funds withdrawing from the Japanese stock market. The core reason for foreign funds withdrawing from Japan is its highly fragile economic structure. The rise in oil prices may cause Japan to fall into stagflation due to a lack of resources, leading to input inflation and economic growth slowdown, creating a situation of stagflation. The US-Iran conflict has reshaped Hong Kong stocks' industry structure primarily through inflation expectations and safe-haven strategies. Firstly, the energy industry has become the only consensus among foreign and domestic investors. Secondly, the information technology industry, dominated by internet giants, has seen significant increase in holdings by foreign funds mainly because technology stocks in Hong Kong, such as Tencent and Alibaba, have attractive valuations after experiencing previous declines. From a safe-haven perspective, the main manifestation is the shift in funds from cyclical stocks to defensive stocks. Currently, most global funds mainly trade in a "Risk-off" mode, with geopolitical risks leading to global stagflation concerns. Global funds, especially passive funds, in order to cope with redemptions or reduce risk exposure, must significantly reduce positions, further increasing industry rotation by discarding high-beta assets and embracing defensive assets. Investment outlook The resilience of Hong Kong stocks comes from being undervalued, attracting risk-averse funds seeking certainty. Foreign funds choose to enter Hong Kong stocks largely due to the valuation gap between Hong Kong stocks and other major global markets (such as US and Japanese stocks). Hong Kong stocks' low valuation usually comes with a high dividend yield, making it very attractive to risk-averse funds seeking stable cash flow. Looking ahead to the next six months, consumer discretionary is the strongest sector in terms of performance and profitability among all sectors of Hong Kong stocks, while the financial sector has ample safety margin. The technology sector demonstrates a dual nature in this turmoil. Risk warning Risks of domestic policy strength and effectiveness falling short of expectations; risks of overseas interest rate cuts falling short of expectations; risks of market instability.