After a strong rally in July, Hong Kong stocks experienced an abrupt reversal on Tuesday (August 6), with the three major indices pulling back significantly. Leading internet stocks that had been steadily recovering traded lower, with Alibaba-W, Xiaomi Group-W, and Tencent Holdings each falling over 2%. The Huabao Hong Kong Internet ETF (513770), which is heavily weighted in these internet giants, opened lower and traded down throughout the day, closing with a 2.81% drop and retreating below its 5-day moving average.

Since July, the Hong Kong internet sector has seen a strong recovery. The underlying index of the Huabao Hong Kong Internet ETF (513770), the CSI HK Connect Internet Index, surged 18.81% in a single month, outperforming major global tech indices in a contrarian move. Feng Chencheng, the fund manager of the Huabao Hong Kong Internet ETF (513770), noted that the rebound was likely driven by a combination of capital inflows, market style rotation, and stabilizing fundamentals.

From a capital flow perspective, southbound net inflows reached approximately HK$62.9 billion in July, a sharp increase of about 132% month-over-month compared to June. The internet sector has seen sustained southbound capital inflows since June 29, reversing five months of outflows and providing crucial market support. Regarding market style, capital in the US market, driven by momentum trading and the unwinding of levered positions, moved from the crowded AI "winner sector" to the "Magnificent Seven," defensive sectors, and other underinvested market areas. This style rotation has also spread to other global economies.

On the fundamentals side, the pessimistic outlook for cloud/AI application providers has reversed, and competition in food delivery has eased, with leading internet stocks showing signs of improving performance. The US earnings season has reshaped the AI narrative. July's earnings reports from Microsoft and Amazon showed investors a closed loop of AI investment and returns for cloud providers: capital expenditures are translating into measurable revenue and profit. For the domestic market, benefiting from sustained AI demand, cloud providers' revenue is expected to maintain a sequential acceleration. Alibaba Cloud is seeing its profit margins rise, entering a profitable upcycle, while Tencent has re-entered the AI arena with its Hy3.0 large model, shifting the "AI loser" narrative. Meanwhile, Meituan and Alibaba have both significantly reduced subsidy spending quarter-over-quarter, suggesting that losses in their instant retail businesses may narrow, leading to improved short-term profit margins and a potential upward revision in earnings as competition eases.

Where to begin?

Looking ahead, Feng Chencheng believes that the global AI industry is increasingly focused on commercialization, with greater sensitivity to the sustainability of capital expenditure ROI, technological competitiveness, AI revenue growth, and operating profit margins. The significant breakthrough in coding capabilities of the domestic model GLM-5.2 has kicked off the second half of AI commercialization in China. From June to July, Chinese AI companies intensively released several important models. Chinese developers are approaching, and in some areas even surpassing, US companies long considered global AI frontier leaders. The trend of open-sourcing models and price cuts has led to the democratization of models, with industry profit margins shifting to cloud providers that have customers and scale effects. As the industry enters a "profit realization" phase, AI value distribution is moving toward cloud providers that hold "computing power and toll gates." Short-term theme investing, driven by improved risk appetite, could potentially continue.

It is noteworthy that, as of the end of the second quarter, public fund holdings of Hong Kong stocks had fallen to levels seen before "924" in 2024. Internet sector holdings are at historically low levels. The potential rebalancing from extreme underweighting of Hong Kong stocks could also provide some support in terms of potential upside. The focus is on the revaluation of leading Hong Kong internet stocks amid the AI transformation. The Huabao Hong Kong Internet ETF (513770) and its connected funds (Class A: 017125; Class C: 017126) passively track the CSI HK Connect Internet Index. Its top ten holdings include tech giants like Alibaba-W and Tencent Holdings along with AI application companies across various sectors, offering significant advantages. It features T+0 trading and good liquidity. For investors bullish on Hong Kong tech but seeking to reduce volatility, the market's first product, the Huabao Hong Kong Large Cap 30 ETF (520560), offers a "tech + dividend" barbell strategy. Its holdings include both high-growth tech stocks like Alibaba and stable, high-dividend stocks from banks and insurance, making it a suitable core holding tool for long-term Hong Kong equity allocation.

Why only 10 ASX 200 shares?

Reminder: Recent market volatility may be significant, and short-term gains or losses do not predict future performance. Investors must invest rationally based on their own capital situation and risk tolerance, paying close attention to position and risk management. Data source: Shanghai and Shenzhen stock exchanges, etc. ETF fee note: When investors apply for or redeem fund shares, the subscription/redemption agency may charge a commission of up to 0.5%, including fees charged by the stock exchange, registration institution, etc. Connected fund fee note: For the Huabao CSI HK Connect Internet ETF Feeder Fund (Class A), the subscription fee (front-end) is 1,000 yuan per order for amounts over 2 million yuan, 0.6% for amounts between 1 million (inclusive) and 2 million yuan, and 1% for amounts under 1 million yuan. The redemption fee is 1.5% for holding periods less than 7 days and 0% for holding periods of 7 days (inclusive) or more. No sales service fee is charged. For the Huabao CSI HK Connect Internet ETF Feeder Fund (Class C), no subscription fee is charged. The redemption fee is 1.5% for holding periods less than 7 days and 0% for holding periods of 7 days (inclusive) or more. The sales service fee is 0.3%. Risk warning: The Huabao Hong Kong Internet ETF and its feeder funds passively track the CSI HK Connect Internet Index. The index base date is December 30, 2016, and it was published on January 11, 2021. The CSI HK Connect Internet Index's total returns for the last five complete calendar years are: 2025: 27.02%; 2024: 23.04%; 2023: -24.74%; 2022: -23.01%; 2021: -36.61%. The index's volatility for the last five complete calendar years is: 2025: 33.60%; 2024: 43.49%; 2023: 32.09%; 2022: 49.01%; 2021: 38.72%. The composition of index constituents is adjusted according to the index's compilation rules. Historical backtest data does not indicate the future performance of the index. The index constituents mentioned in this article are for illustration purposes only, and descriptions of individual stocks do not constitute investment advice of any form, nor do they represent the holdings or trading activities of any fund managed by the fund manager. The fund manager assesses the risk level of this fund as R4 (Medium-High Risk), suitable for aggressive (C4) and above investors. Any information appearing in this article (including but not limited to stocks, comments, forecasts, charts, indicators, theories, any form of expression, etc.) is for reference only. Investors must be responsible for their own investment decisions. Furthermore, any views, analysis, and forecasts in this article do not constitute investment advice of any form to readers, and the author is not responsible for any direct or indirect losses arising from the use of the content of this article. The performance of other funds managed by the fund manager does not constitute a guarantee of the fund's performance. Past performance does not represent future results. Fund investment carries risks. Please invest with caution. MACD golden cross signal forming, these stocks are performing well!