Hong Kong’s Stock Market Surges Amid Wall Street Turmoil

Hong Kong's stock market has emerged as a standout performer during the initial 50 days of Donald Trump's presidency. The Hang Seng Index has climbed 21% since Trump took office, making it the world's top-performing benchmark. In contrast, the S&P 500 has dropped around 7%, lagging behind most global indices. A 90-day correlation measure indicates that the gap between these two indices is now at its widest since the dotcom crash of 2000.

Global investors are flocking to Hong Kong, drawn by China’s rapid advancements in artificial intelligence, while Trump’s trade policies and unpredictable decision-making continue to shake confidence in the U.S. economy. With a $6 trillion stock exchange, Hong Kong has become the go-to destination for Chinese tech listings, benefiting from its deep liquidity.

A Shift in Investment Strategy

“For years, we have been anticipating this shift,” stated Thomas Ip, executive director at Gaoyu Securities Ltd. “Trump's erratic policies have introduced significant uncertainty to U.S. markets. As concern mounts, smart investors are turning to Hong Kong, where stock valuations are more attractive and the regulatory environment is more stable.”

Despite escalating tariffs on Chinese exports, indicators suggest Hong Kong’s stock market will continue its impressive performance. Analysts are increasingly optimistic about Chinese stocks while reducing their outlook on U.S. equities. As confidence in American tech companies declines, mainland Chinese investors are ramping up their investments in Hong Kong stocks at record levels.

The turning point came when DeepSeek unveiled a cost-effective AI model shortly after Trump’s inauguration. This unexpected breakthrough cast doubt on Trump's assertion that the U.S. was the global leader in AI, wiping $1 trillion off the U.S. stock market.

Until then, China had remained a secondary player in the global AI race, partly due to U.S. restrictions on semiconductor exports from companies like Nvidia, which are crucial for machine learning.

Reconsidering China's Market Potential

“If someone had told me at the start of the year that China would become a formidable player in AI, I wouldn’t have believed it,” said Kok Hoong Wong, head of institutional equities sales trading at Maybank Securities in Singapore.

The realization that China had made significant AI advancements despite U.S. restrictions upended the prevailing investment narrative, which had favored American equities for the past two years.

Suddenly, the perception of China as an “uninvestable” market shifted, while enthusiasm for U.S. tech stocks waned. As capital flowed into Chinese tech firms and the Nasdaq 100 struggled, major Chinese companies rushed to showcase their AI breakthroughs and massive investments in the field.

Alibaba, which has been at the forefront of this rally with a nearly 70% surge since January 17, introduced an open-source AI model and committed over $53 billion to AI infrastructure.

“Our portfolio has started shifting away from U.S. markets toward European and Chinese investments since February,” said Mabrouk Chetouane, head of global market strategy at Natixis Global Asset Management.

Challenges Remain, but Optimism Grows

The surge in Chinese stocks is unfolding despite concerns over the country’s economic stability. Consumer prices dipped into deflation last month, while factory prices have been falling for nearly 30 months, indicating weak demand. The real estate sector remains under pressure, and the government faces increasing pressure to stimulate growth. Additionally, uncertainty looms over Trump's future policies toward China.

“Geopolitical risks remain the biggest concern,” noted Calvin Zhang, a senior portfolio manager at Federated Hermes.

Still, President Xi Jinping’s renewed focus on the technology sector signals a shift. Last month, Xi gathered top tech executives in Beijing and reassured them that it was acceptable to “get rich first,” marking an end to the regulatory crackdowns that had previously hampered the industry. Among those in attendance was Alibaba’s Jack Ma, who had largely withdrawn from public view in recent years.

“The moment Chinese officials started actively supporting private tech firms, it marked a new era,” said George Efstathopoulos, portfolio manager at Fidelity International. “For the first time, we’re not selling the rally when it comes to Chinese equities.”

China’s AI Push Accelerates

China’s challenge to U.S. dominance in AI is gaining momentum. Last week, Chinese startup Manus announced a breakthrough, claiming to surpass leading American developers in creating advanced AI systems capable of handling complex tasks.

Meanwhile, expectations for U.S. stocks continue to decline. Citigroup recently upgraded its outlook on China to "overweight" while downgrading U.S. equities. Similarly, HSBC reduced its U.S. equities rating to "neutral," arguing that better investment opportunities exist elsewhere.

Goldman Sachs analysts have gone so far as to rename the “Magnificent 7” tech giants as the “Maleficent 7,” slashing their S&P 500 forecast.

A Rare Turnaround for Hong Kong

For Hong Kong’s stock market, this resurgence is a dramatic reversal. Over the past six years, the U.S. benchmark index had soared by 120%, whereas the Hang Seng had dropped 33%.

The rebound is also restoring Hong Kong’s reputation as a financial hub, which had suffered amid concerns over national security laws, China’s economic slowdown, and a slump in initial public offerings. At one point, Chinese social media dubbed Hong Kong the “ruins of an international financial center.”

Now, activity is picking up. Electric vehicle manufacturer BYD, which has been gaining ground on Tesla globally, raised $5.6 billion in Hong Kong’s largest share sale in nearly four years. Speculative trading is also surging, with retail investors securing more than $353 billion in margin loans to bet on high-profile IPOs.

At present, there is little sign that this surge will slow down. On Monday, Chinese investors purchased a net HK$29.6 billion ($3.8 billion) worth of Hong Kong stocks—the highest amount since trading links with mainland exchanges were established in 2016, according to Bloomberg data.

For U.S. stock investors, the worst may still be ahead. “Regardless of the market, investors seek two key factors: corporate earnings growth and economic stability,” said Chetouane of Natixis. “Right now, both are declining in the U.S. while stabilizing in China.”