The recent surge in interest surrounding the DeepSeek concept has had a significant ripple effect on the Hang Seng Tech Index, which has catapulted over 33% since mid-January, outperforming major indices in both the A-share market and the US stock marketThis movement highlights how market sentiments can significantly impact equity valuations, especially within the technology sector.

Investment flows into Hong Kong's tech assets have seen a remarkable uptick, with data revealing that from January 24 to February 13, nearly HKD 13 billion in foreign capital reinvigorated the marketFurthermore, from February 17 to February 19 alone, net inflows from southbound trading exceeded HKD 40 billionThese statistics underscore a strong appetite for tech stocks among both local and foreign investors, generating a new wave of optimism in the Hong Kong stock market.

Despite the enthusiastic wave of buying, analysts remain divided on the future trajectory of the Hang Seng Tech IndexSome believe that with the confluence of newfound liquidity and heightened market sentiment—a condition often referred to as "spring fever"—the upward momentum could continue in the short termConversely, there are warnings that the rapid ascent in the index may invite a subsequent correction.

On February 19, the tech sector demonstrated resilience, closing slightly higher even as the Hang Seng Index overall declined by 0.14%. The day highlighted strong performances from semiconductor firms, with companies such as Hua Hong Semiconductor, SMIC, and Sunny Optical Technologies posting impressive gains of 22.95%, 8.37%, and 5.4% respectivelyThis resilience is noteworthy, given the context where the Hang Seng has rallied sharply over the past month, being propelled from a low of 4,168.04 points on January 13 to 5,672.24 on February 19, marking a stunning rally of over 33%. This resurgence underscores the capability of market sentiment to drive stock prices significantly higher when investor confidence is bolstered by compelling narratives.

But what exactly has fueled this remarkable increase in the Hang Seng Tech Index? Many market observers point to the release of powerful domestic AI models, particularly DeepSeek and Alibaba's Qwen2.5-Max, which have garnered international attention for their capabilities

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These breakthroughs have prompted a reevaluation of the technology assets within Hong Kong, thus providing a gasoline-like effect to the index's performance.

According to Zhang Chi, Chief Strategist at Guojin Securities, one driving force behind Hong Kong's leadership in global equity markets is the high "AI content" of its technology stocksThis distinguishes them from comparable firms in the A-share marketA comparison between the FTSE China A50 Index—which reflects the largest companies in mainland China—and the FTSE China 50 Index, which tracks large Chinese firms listed in Hong Kong, reveals a significant difference in AI exposureThe former has an "AI inclusion" rate of about 26.1%, while the latter boasts a much higher figure of 46.9%.

Investment manager Yu Xiaochang emphasizes that the recent spike in Hong Kong tech equities primarily results from the DeepSeek phenomenon re-evaluating the potential of high-quality Chinese tech companiesHowever, as prices skyrocket, the ratios diminish, leading investors to contemplate locking in profits after substantial gains.

In addition to the concept-driven excitement in the tech sector, a robust inflow of capital—both foreign and domestic—is taking placeCITIC Securities reports that from January 24 to February 13, foreign capital investment in Hong Kong tech stocks soared nearly HKD 13 billion, with allocations especially favoring undervalued tech and consumer sectors.

Local investment is also picking up, as evidenced by southbound trading netting an additional HKD 10.325 billion inflow on February 19 aloneTo date, southbound trading has funneled HKD 1,959.09 billion into Hong Kong stocks this year, including a record high inflow of HKD 1,255.92 billion in January alone—the highest seen in 47 months.

As Zhang Yi, CEO and Chief Analyst of iiMedia Consulting, noted, there is a shift occurring in the investment logic employed by foreign capitalPreviously, when the market demonstrated instability and lack of confidence, foreign investment often leaned towards short-term trading

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Now, however, there appears to be a greater willingness to hold investments for the longer term, largely driven by a significant influx of southbound capital.

What factors are propelling both local and foreign investments into the Hong Kong stock market? Zhang notes that an uptick in domestic M1 liquidity has pushed funds southward into Hong Kong stocks, complemented by the strong momentum effect intrinsic to the market itselfFurthermore, easing "overseas pressures" has also facilitated a small but marked return of foreign capital.

As the tech stocks continue their impressive ascent, investors are left wondering if they should continue to buy into this momentumInstitutional perspectives still varySome see a positive recovery trend for Hong Kong sharesFor instance, Kong Rong, Chief Analyst of Global Technology at Tianfeng Securities, predicts that the Hang Seng Index may rise by over 17% in 2024, ending a streak of four consecutive declinesHe believes that, amidst an encouraging climate of global liquidity and increased domestic growth policies, the risk-return profile of Chinese tech assets has substantially improved as foreign investor confidence rebounds.

In contrast, there are voices advocating a more cautious approachYu Xiaochang acknowledges that while there is still room for growth in the Hong Kong market, the path ahead may not be smooth—especially since current risk premiums are rather modestThus, he suggests considering profit-taking opportunities as they arise, particularly when significant rallies occur.

Additionally, as Zhang Yi pointed out, the recent brisk rise in tech stocks could lead to profit-taking activities amongst investors, emphasizing the need for a balanced and realistic outlook moving forwardInvestors shouldalso remain vigilant regarding external risks that could disrupt market stability, such as shifts in international geopolitical dynamics or changes in the Federal Reserve's interest rate trajectory, both of which could profoundly affect future market volatility.

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