【Major Bank Report】 HSBC: Northbound capital holdings act as a stabilizer; prefers bank stocks over insurance stocks

HSBC Global Investment Research Releases Report: Guide to Capital Flows Showing Record Highs of Outflows and Inflows in Recent Days, Increasing Investor Questions. HSBC believes that southbound funds holding stocks act as stabilizers. Although short-term fluctuations are expected, confidence remains in long-term capital inflows.

Regarding industry sectors, HSBC favors banking stocks over insurance stocks. For individual stocks, preferences include HKEX (00388), BOC Hong Kong (02388), ICBC (01398), and CCB (00939).

Increased Volatility: Market Seeks to Understand the Impact of Southbound Capital Flows

HSBC reports that on March 5, southbound funds recorded a record high net outflow of HKD 28 billion, but by March 9, there was a record high net inflow of HKD 37 billion. Investors are asking what this means and what the outlook is, and how these fluctuations will affect financial stocks’ investment performance.

HSBC indicates there are two main points. First, holdings by southbound funds serve as a stable source. Institutional investors are usually constrained by strict risk management frameworks, focusing on metrics like Value at Risk (VaR) or stress testing. Increased volatility may raise risk indicators, leading to a demand for risk reduction. In this context, positions in mutual funds, quantitative funds, and hedge funds may change more significantly than those in insurance companies; the latter may include dividend-paying stocks in financial assets measured at fair value through other comprehensive income (FVOCI), fulfilling long-term insurance needs. This suggests that, under current market conditions, insurance companies with high holdings of dividend-paying stocks—such as state-owned banks and BOC Hong Kong (02388)—may outperform the broader market.

Second, long-term confidence remains, but short-term turbulence is possible. After strong net inflows of southbound funds in January and February, the outlook for March and Q2 2026 may become less certain. Recent weakness is attributed to reduced risk appetite, but long-term capital inflows remain optimistic due to factors such as: (1) net population inflow into Hong Kong; (2) higher expected returns on USD and HKD investment products compared to RMB; (3) market perception of lower geopolitical risks in Hong Kong; (4) shifting wealth allocation from onshore real estate to financial products; and (5) China’s further development of the interconnection mechanisms covering stock markets and fixed income.

Among Hong Kong financial stocks, HSBC prefers HKEX and BOC Hong Kong over AIA (01299). The report states that HKEX’s revenue is expected to benefit from increased market activity; BOC Hong Kong is more suitable for long-term income-focused investors, as easing rate cut expectations may support its net interest margin; AIA’s Hong Kong distribution business mainly involves investment-linked policies, with high growth expectations. Among Chinese financial stocks, short-term preferences lean toward banks over insurance companies, as banks have a solid track record of profit and dividend stability, with lower exposure to market risks. HSBC favors large state-owned banks, including ICBC H-shares and CCB H-shares, and also sees relative undervaluation of CMB’s A-shares compared to its H-shares.

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