February 3, 2026 09:00 PM GMT China Equity Strategy | Asia Pacific Enhancing MSSBT – Capturing Full Alpha From Southbound Eligibility We introduce MSSBT V2, an enhanced forecast model aiming to capture greater alpha generation than V1 by incorporating Southbound deletions, in addition to inclusions. Backtesting shows a 93% hit ratio for our new deletion forecast model and an average 25% absolute return of our two-way trading strategy. Southbound inflows hitting record-highs with prominent impact on the Hong ...

Summary of Morgan Stanley Southbound Inclusion Trading Strategy Conference Call Industry Overview - The conference focuses on the Southbound Stock Connect (SB) trading strategy, which is a significant liquidity source for the Hong Kong equity market, particularly as it relates to mainland Chinese stocks. Key Points and Arguments 1. **Launch of MSSBT**: Morgan Stanley has launched the Morgan Stanley Southbound Eligibility Trading Strategy (MSSBT), a proprietary model designed to predict stocks for Southbound inclusion and capitalize on their price momentum ahead of the event, conducted semi-annually [1][4][21]. 2. **Historical Performance**: Stocks included in Southbound Stock Connect have historically shown strong performance, generating average absolute returns of 1.6-3.7% and alpha of 2.4-5.2% relative to the Hang Seng Index in the 15- and 30-day periods leading up to inclusion [2][15][49]. 3. **Liquidity Trends**: Southbound trading now accounts for over one-third of daily turnover on the Hong Kong Main Board, with SB holdings representing approximately 15% of the free float market capitalization of eligible stocks, indicating a significant increase of over 30% since 2024 [12][19][29][36]. 4. **Upcoming Inclusion Forecast**: For the September 2025 inclusion, 19 candidates across seven sectors have been identified, with notable companies including CaoCao Inc. (2643.HK) and Duality Biotherapeutics (9606.HK) [6][8][14]. 5. **Back-Testing Results**: The MSSBT model has achieved an average hit ratio of 85% over the last four semi-annual inclusion cycles, with pro forma portfolios constructed based on MSSBT forecasts yielding average returns of 10.1% in absolute terms and 7.4% relative to the Hang Seng Index within 30 days prior to inclusion [5][25][27]. 6. **Sector Performance**: Certain sectors, such as Telecoms, Energy, and Health Care, have seen Southbound ownership exceed 40% of total sector free float market capitalization, highlighting the varying impact of SB flows across different industries [38][41][42]. Additional Important Insights - **Investment Opportunities**: The growing A-H dual listing universe and exclusive investment opportunities in sectors like Internet and New Consumption are expected to keep Hong Kong attractive for Southbound investments [12]. - **Market Dynamics**: The increasing prominence of Southbound flows is transforming the ownership structure of stocks in Hong Kong, providing liquidity support and influencing price movements, particularly for stocks with solid fundamentals [38][39]. - **Performance of Newly Added Stocks**: Stocks added to the SB channel tend to outperform the broader market, with an average price increase of 3.7% and 1.6% in the 30 and 15 days prior to inclusion, respectively [49]. This summary encapsulates the critical insights and data points discussed during the conference call, providing a comprehensive overview of the Southbound trading strategy and its implications for the Hong Kong equity market.