The Hong Kong stock market has recently seen a surge, leading many investors to weigh their optionsPhrases like "Should I take profits now?" and "I've made almost 30% gains; is it time to withdraw?" have echoed through the investor community as market conditions warmthHowever, the latest trends reveal a mixed sentimentWhile some investors are looking to capitalize on profits, there is also a notable outflow from various high-performing Exchange-Traded Funds (ETFs) linked to Hong Kong's thriving technology sectorIn contrast, dividend-related ETFs have seen an influx of investment, indicating a strategic shift among investors as they navigate these changing tides.

The hot question remains: What prompts these shifts in investor sentiment? According to Luo Jiaming, the manager of the China Europe Fund’s Hong Kong equity strategy, the ongoing market recovery offers fresh investment opportunities in both the A-share and Hong Kong marketsHe argues that the focus this year is wisely placed on the valuation adjustments of Chinese assets: "The past few years have seen considerable declines in Hong Kong's stock values, presenting a relative bargain and offering significant potential for recovery." His statement encapsulates the buying opportunity that many are eyeing as valuations approach more reasonable figures.

Wang Xinchen, manager of the Core Assets Fund focusing on the Hong Kong internet industry, concurs that the crux of investment always revolves around earnings forecasts and valuation pricingThe overall market valuations, he notes, are currently low, presenting a favorable scenario for both current investors and potential newcomersNevertheless, an across-the-board market rally, as Wang cautions, may carry risks of underperformanceVarious businesses are still grappling with performance pressures stemming from the prevailing economic uncertaintiesHis advisory emphasizes that while some companies may swiftly capitalize on rising valuations, others could soon face the consequences of overinflation—leading to a market correction.

The story thus far illustrates a scenario of high selling amidst increasing share prices

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Since the start of this year, the Hong Kong stock market has continued its rebound from last year's lowsFollowing a brief dip, the Hang Seng Index recorded an impressive 14.54% increase by February 18, with the Hang Seng Technology Index outperforming with gains exceeding 26.21%. This upward trajectory has drawn interest in the region’s mutual funds and ETFs that focus on pure Hong Kong stock indices, with many realizing returns of over 20% this year alone.

Among the outperformers are ETFs geared towards internet and technology sectors, which have nearly monopolized the best-performing positions in the market rankingsFor example, those from reputable fund houses such as Invesco, E Fund, and Huabao have exhibited returns between 26.33% and 26.71%. When analyzed over a longer timeline from last September, the cumulative returns of these pure Hong Kong stock ETFs show significant positive trends, with some products, like E Fund's Hong Kong Securities Investment Theme ETF, soaring by nearly 69.48%.

However, there's a clear bifurcation in the market right nowThe data tells a compelling narrative about fund flowsThere has been a significant outflow from various ETFs, particularly those tracking indices related to technology and internet sectorsFor instance, the previous month saw net withdrawals of 130.7 billion yuan, with specific ETFs suffering the most substantial lossesThe Hua Xia Hang Seng Internet Technology ETF, for example, faced a staggering 62.59 billion yuan outflow, despite posting a year-to-date return of 23.48%. Several other comparable funds also recorded net withdrawals exceeding 12 billion yuan.

On the flip side, dividend-related ETFs are benefiting from these shifting dynamicsNet inflows have been substantial for these funds—they attracted over 26 billion yuan this month aloneFunds like the China Central State-Owned Enterprises Dividend ETF and the Morgan Stanley S&P Hong Kong Low Volatility Dividend ETF, recorded inflows of 8.83 billion yuan and 6.64 billion yuan, respectively

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The market’s "king of cash absorption" is the GF Securities' Hong Kong Innovative Medicines ETF, pulling in a whopping 14.05 billion yuan.

Interestingly, many of these high-dividend funds report yields below 9%, signaling a strategic pivot from growth stocks to those promising steady incomeSome funds, despite seeing inflows, haven't posted positive returns on the year; this suggests that investors are actively seeking stability over risk in the current volatile climate.

Additional insights arise from the ongoing influx of southbound capital—investors from mainland China looking to buy into Hong Kong sharesOn February 18, net purchases reached an impressive 209.2 billion yuan, marking a record high for the yearThis sustained influx has contributed to a total net buy of 1,744.65 billion yuan since the start of the year, emphasizing strong bullish sentiment from mainland investors seeking growth opportunities across the border.

As for the sustainability of this recent bull run in Hong Kong stocks, experts like Luo Jiaming attribute the current uptrend predominantly to the tech sector's momentumThe burgeoning wave of technological innovation, particularly in AI, is significant, representing a turning point for many companies, allowing them to unlock hidden value in a marketplace that has been historically undervalued.

Wang Xinchen shares similar thoughts, predicting that developments in local AI models starting from 2025 could reshape how international investors perceive Chinese internet assets, which have become undervaluedThe landscape demonstrates resilience in performance; despite past volatility, these firms are leading China’s drive in AI innovation and gaining traction in what has moved from speculation to a more substantial narrative for growth.

Looking ahead, however, lingering questions remain around whether the upward trend can be sustained as the market processes this phase of growthThe Hang Seng Qianhai Enhanced Mixed Fund's manager, Xing Cheng, maintains that the enduring nature of the current rally hinges on the visibility of meaningful advancements within China’s AI and technology sectors

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