The market for technology stocks in Hong Kong has experienced a remarkable resurgence, drawing the attention of investors who are beginning to reassess their portfolios in light of this recent upswingObservations indicate a growing inclination among investors to cash out profits, as indicated by net capital outflows from several strong-performing exchange-traded funds (ETFs) in the tech sectorInterestingly, at the same time, ETFs related to dividend assets are seeing inflows, reflecting a tactical shift in investment strategies.

This divergence in sentiment among investors highlights a critical moment of reevaluation; some believe that growth in technology has become the dominant theme for investment, while others continue to favor lower volatility stocks that offer stable dividendsAs of mid-February 2024, the Hang Seng Index has risen by 14.38%, with the Hang Seng Technology Index climbing an impressive 26.95%, even reaching a three-year high recently.

According to Wind data, as of February 18, 2024, 135 index funds investing in Hong Kong stocks have yielded an average return of 11.3% this year, with 30 funds showing returns exceeding 20%. Notably, the Hong Kong Stock Connect Internet ETF has achieved returns of 30.27%. On the whole, products focused on internet and technology themes within the Hong Kong market are among the top performers this year, with the top 20 returns across the entire market all coming from this categoryExamples include the Hong Kong Stock Connect Internet ETF (159792.OF) and its counterparts.

Additionally, within a broader context of over 10,000 fund products in Hong Kong, 55 of the top 100 performances in the year have been driven by ETFs that are linked to the internet and technology sectorsWith 22 funds tracking the Hang Seng Technology Index and several other indices relevant to tech, it is evident that the appetite for these assets remains strong.

Investment analysts, like He Jinlong from Youmeili Investment, attribute this bullish trend in the Hang Seng Technology Index and other tech stocks to several pivotal factors

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First and foremost is the supportive policy environment established by the Chinese government, which has focused on growth strategies and provided substantial backing to innovative enterprises, high-tech manufacturing, and artificial intelligence (AI) sectors.

Moreover, an influx of capital from both Southbound capital flows and foreign investments has significantly enhanced liquidity in the Hong Kong marketFor instance, on February 18, Southbound capital inflows reached HKD 22.6 billionSince the start of the year, HKD 185.6 billion has flowed into the marketWith technology stocks becoming a focal point for these investments, it's clear that the Hang Seng Technology Index is benefitting from this trendInvestors are betting on the resilience of technology sectors amidst a backdrop of weakening U.S. dollar policies and a more accommodating Federal Reserve.

Thirdly, the excitement surrounding the release of the DeepSeek large model has rekindled interests centered on AI innovations, bringing renewed attention to numerous companies within the Hong Kong technology stocks that are heavily invested in AI applicationsThe integration of AI into end-user products encourages growth across various tech sectors, such as consumer electronics and e-commerce.

Lastly, from a valuation perspective, the Hang Seng Technology Index is currently viewed as undervaluedIt has a price-to-earnings ratio projected to be 18 times by the end of 2024, significantly lower than that of the Nasdaq Index at 26 times and the ChiNext Index at 35 timesThis comparatively low valuation enhances risk appetite in the Hong Kong market, creating a positive feedback loop that underpins the recent rally in the Hang Seng Technology Index.

However, as the market heat intensifies, investor opinions are becoming polarizedEvidence of capital withdrawal has emerged from ETFs tracking the Hang Seng Technology Index and the Hang Seng Internet Technology Index, illustrating a phenomenon where investors appear to be selling amid rising stock prices

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The trend of "buy high, sell higher" is increasingly becoming apparent.

Chen Shi, a fund manager at Mingze Investment, pointed out that despite the ongoing rally in Hong Kong stocks, there has been a noticeable tendency for some funds to realize profits from their positions in technology fundsThis has been counterbalanced by inflows into various dividend-related ETFs.

Furthermore, Wang Yi, a researcher at Jinzhan Investment under Geshang Wealth Management, acknowledged this shift, indicating that investors are moving capital towards sectors relating to dividends or 'China manufacturing'. The rationale is that dividend stock investments provide much-needed stability and yield, especially amidst potential economic fluctuations.

As of February 17, reports indicate that ETFs tracking the Hang Seng Technology Index have seen net outflows of 6.685 billion yuan and similar trends in related technology indicesConversely, dividend-related ETFs attracted nearly 3 billion yuan in net inflowsThe stage may be set for a sector rotation, as a notable focus has emerged on a Hong Kong innovative pharmaceutical ETF, which has become one of the month’s most attractive assets, garnering significant capital.

Despite some skepticism regarding the sustainability of the Hong Kong stock rally, many institutional investors remain hopeful about the long-term growth of technology stocksA representative from an investment firm specializing in Hong Kong stocks suggested that the recent surge in technology shares is primarily driven by short-sellers having to buy back, a temporary situation propelled by increased Northbound capital flows, combined with rising technology stock weights such as Tencent and Alibaba.

However, ongoing concerns about the lack of sustainable underlying factors for this rally leave room for cautionA representative remarked that this spike in stock values driven by external capital could potentially mirror past gains seen in May and September 2024, indicating that the bullish sentiment might not be sustained.

Conversely, some investors are taking a more optimistic stance on the prospects for technology stocks in Hong Kong

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