Shanghai Securities News | Middle East Capital Quietly Flows In—Are China "Hardcore Assets" Become Next Hot Trend?

The Middle East impasse since the beginning of this week has prompted repricing of macroeconomic impacts of geopolitical conflicts and oil prices. Against heightened safe-haven demand, movements of Middle East capital have also come under spotlight. Will large sovereign wealth funds and institutional capital from the region diversify their portfolios to Chinese assets, which have lower correlation with global volatility? Are there signs that Middle East capital has flowed into Hong Kong equities? Which Chinese assets are most favored by Middle Eastern investors?

Liu Gang, Managing Director and Chief Overseas and Hong Kong Equity Strategist at CICC, stated that there are certain driving forces behind Middle East capital inflows into the Hong Kong market. On the one hand, external capital with financial centers in the Middle East may reconsider their regional allocations due to safe-haven considerations. Recent sharp declines in Middle Eastern stock markets and Dubai real estate prices, along with EPFR data showing significant capital outflows from the region, serve as evidence. As a sophisticated and relatively more stable financial center, Hong Kong, China is well positioned to accommodate the reallocated capital. On the other hand, driven by diversification and risk dispersion needs, local Middle East capital may increase allocations to the Chinese market.

Based on EPFR fund flows, exchange rates, interbank liquidity, and Hong Kong stock trading activity, Liu believes there is short-term evidence of Middle East capital inflows into Hong Kong equities, such as the deepening inversion of AH share premiums for certain stocks. However, simply by looking at overall market trading activity and EPFR fund flow data, there is no immediate evidence of large-scale capital inflows into the equity market.

Li Changfeng, Head of Market Strategy at AllianceBernstein, noted that in the context of geopolitical tensions in the Middle East, de-dollarization may be a more critical factor influencing asset allocation than oil price fluctuations. In the short term, Middle East conflicts affect the stability of energy prices; in the long term, they relate to the foundation of the "petrodollar" system.

"Therefore, we believe this conflict may drive a shift in capital allocation, potentially reversing the previous trend of sustained underweight positions in emerging markets. In fact, we are already seeing signs of capital gradually returning to emerging markets, which could support the performance of their capital markets, " Li said.

Zhang Yidong, Executive Committee Member and Chief Economist at Haitong International, recently stated that amid the current Middle East conflict, "hardcore assets" such as energy, gold, and resources are undergoing a strategic revaluation, while China's "hardcore assets" are expected to perform well over the long term.

Zhang noted that the Chinese stock market currently offers compelling value, with valuations at relatively low global levels and a pronounced discount compared to international markets, leaving significant room for catch-up in valuation terms. China's "hardcore assets" are expected to become a core driver of future market performance.

He recommended that investors follow the "SMART" stock selection framework for China's "hardcore assets", namely: Security (energy/resource security); Manufacturing Abroad; and R&D Technology. Specifically, the energy/resource security segment includes gold, the energy industry chain, and resources such as rare earths, minor metals, copper, and aluminum. Manufacturing abroad refers to globally competitive leaders in sectors such as machinery, power equipment, home appliances, automobiles and components, pharmaceuticals and healthcare, and petrochemicals. R&D technology focuses on strategic emerging and future industries, including semiconductors, high-end equipment, new energy, new materials, robotics, innovative drugs, aerospace, quantum technology, biomanufacturing, hydrogen energy and nuclear fusion, brain-computer interfaces, embodied intelligence, and 6G.

In Liu Gang's view, Middle East capital allocation is not a one-step process, and entry into the Hong Kong market may not come in forms of direct investment into equities. He cautioned that Middle East capital allocation in China tends to be long-term and diversified, rather than characterized by hot money inflows. In recent years, Middle East capital has participated in IPOs and private placements in the Hong Kong market, with a focus on sectors representing China's core assets, such as new energy, high-end manufacturing, and technology.

Since 2025, alongside a surge in IPO activity in the Hong Kong market, international capital from the Middle East has expanded its presence in Hong Kong's equity financing market. For example, in February this year, Eastroc Beverage was listed on the Main Board of the Hong Kong Stock Exchange. Chen Ge, Co-Head of Investment Banking at UBS Securities, noted that cornerstone investors in the offering included the Qatar Investment Authority (QIA), one of the largest sovereign wealth funds in the Middle East, as well as Temasek Holdings of Singapore. Leading global long-term institutional investors such as BlackRock and Fidelity were also among the participants.

"It is worth noting that this marks the first time the Qatar Investment Authority has participated as a cornerstone investor in an A+H project, its first investment in a Hong Kong-listed consumer sector IPO, and its first cornerstone subscription in a Hong Kong IPO in the past five years, " Chen said.

In another example, the Abu Dhabi Investment Authority (ADIA) has, since 2026, acted as a cornerstone investor in the Hong Kong IPOs of Jingfeng Medical-B and MINIMAX-W. Meanwhile, the Kuwait Investment Authority (KIA) subscribed USD 500 million worth of cornerstone shares in CATL's Hong Kong IPO in May last year, becoming one of the largest cornerstone investors in the offering.

Huang Peihao, Head of Asia-Pacific Equity Capital Markets at JPMorgan, previously told Shanghai Securities News that for international long-term investors, particularly sovereign wealth funds in the Middle East, geopolitical disruptions are unlikely to materially affect their medium- to long-term investment strategies. While geopolitical developments remain uncertain, from a strategic perspective, the trend among Middle East sovereign wealth funds toward diversifying away from oil assets and increasing investment in the Chinese market has strengthened over the past 12 months and is expected to continue.

Author: Wang Youruo