The Hang Seng surge

Could the China trade make a comeback? That was a question for investors to mull as Washington and Beijing signed a trade deal that appeared to formalise an earlier handshake agreement.

James Cook, Investment Director for Emerging Markets at Federated Hermes Limited, notes that, over the past four years, global capital has chased the relative stability and performance of the US tech sector.  In contrast, investors have viewed Asia — India, Taiwan and China in particular — as increasingly un-investable. 

“The macroeconomic headwinds, regulatory overhang, and geopolitical tensions made it easy for investors to stay away – and many did,” he says. “The rise of ‘Global Emerging Markets (GEMs) ex-China’ strategies has been a clear signal: investors haven’t just been underweight China; they have actively excluded it.”

Fast forward to today, however, and the narrative appears to be shifting – at least in Hong Kong. The Hang Seng Index has surged 23.2% year-to-date (YTD), marking its strongest relative outperformance versus the CSI 300, the mainland China blue-chip Index, since 2008, which has delivered 2.2% YTD.

“This divergence is striking and speaks volumes about where investor confidence lies within the broader China complex,” says Cook.

Data suggests that the rally in Hong Kong has been driven not by foreign inflows, but by domestic capital – specifically, mainland investors accessing the territory’s market via southbound Stock Connect, which allows mainland Chinese investors to access the Hong Kong market. 

For Cook, this reflects mounting concern about China’s domestic economy, meaning investors are looking outward. Hong Kong’s tech-heavy listings and recovering IPO pipeline offer a compelling alternative. "Mega-caps listed in Hong Kong and the US have become key vehicles for this rotation."

Yet despite the rally, foreign institutional investors remain largely on the sidelines. Flows have been predominantly from hedge funds — tactical, short-term capital — rather than long-only money making a structural return, notes Cook, adding that scars from past drawdowns run deep. 

“Even the excitement around China’s AI ambitions has been tempered by a series of geopolitical flashpoints: ‘Liberation Day’ tariffs and uncertainty as the end of the 90-day tariff pause looms.”

“In short, Hong Kong is rallying — but it’s not a broad-based vote of confidence in China. It’s a tactical trade, driven by domestic capital and selective optimism. For foreign investors, the bar for re-engagement remains high.”

The nuance behind the news

Elsewhere, investors continue to consider the impact of the so-called US dollar flight. 

Here, the recent US strikes on Iran and the resulting spike in oil prices have added to an already volatile and unpredictable global economic backdrop – with Moody’s recent downgrade of US creditworthiness and anaemic performance by US equities, bonds and the US dollar all contributing to a growing “sell America” narrative. 

Lewis Grant, senior portfolio manager, Global Equities, Federated Hermes Limited, notes that, while the US macro picture remains mixed, hard economic indicators continue to show resilience. In addition, he says, investors are closely watching the passage of the so-called Big, Beautiful Bill, which is expected to be broadly supportive of risk assets.

“All of this makes for a nuanced picture,” Grant says. “The expiration of the 90-day tariff truce on July 9 is likely to bring trade tensions back into focus, adding another layer of complexity. But if progress is made — either through a resolution or extension of the tariff pause and/or the successful passage of the bill — sentiment toward US markets could improve meaningfully.”