Over the past few weeks, the Hong Kong stock market has been like a "roller coaster," experiencing significant ups and downs.

The "924 policy combination punch" has driven a comprehensive rise in Chinese assets, with the Hong Kong stock market also showing strong momentum; during the National Day holiday when A-shares were closed, the Hong Kong stock market maintained a strong upward trend, and as of October 7th, the Hang Seng Index's year-to-date increase exceeded 35%, ranking first among global key indices; however, after the holiday, the Hong Kong stock market did not create new highs together with the A-shares—on October 8th, the Hang Seng Index and the Hang Seng Technology Index closed sharply lower, basically giving back the gains made during the National Day period.

Is the current fluctuation in the Hong Kong stock market a "reverse gear to pick up passengers" or has the trend changed? How should the Hong Kong stock market be allocated recently? Today, Xiao Xia will discuss this in detail with everyone~

1

How to view the current pullback?

Before the A-shares marched forward with high volume, starting from early August, the Hong Kong stock market took the lead in "running ahead" and started this round of valuation repair. After the Federal Reserve released an unexpected interest rate cut signal, the Hong Kong stock market turned on the button for accelerated upward movement.

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In fact, if we look at the long term, from the beginning of the year to now, the Hong Kong stock market has quietly become one of the most outstanding markets in terms of annual global market gains.

The recent pullback in the Hong Kong stock market can be attributed to the following reasons:

Active capital taking profits and exiting

During the National Day holiday, the Hong Kong stock market rose significantly: as of October 7th, the Hang Seng Technology Index rose by 41.15% in the past year, and the Hang Seng Index rose by 32.10% in the past year.The surge in the market has also been accompanied by an intensification of market divergences. The market has shown a clear state of being overbought in the short term (the 14-day RSI once rose to a historical high of 90.9), and the rapid decline in short-selling indicators also indicates an overextension of sentiment (the proportion of short-selling transactions fell from a high of 18.3% in late September to 12.8%).

During the holiday period, there has been a situation where active funds have taken profits from the Hong Kong stock market, which had risen significantly.

Adjustment of US Interest Rate Cut Expectations

The latest US employment data has shown a recovery, with the unemployment rate falling from 4.2% in the previous month to 4.1%, which is better than expected.

The market's expectation that the Federal Reserve will cut interest rates by 25 basis points rather than 50 basis points at the November interest rate meeting has increased.

Hong Kong stocks belong to the US dollar offshore market, and their valuations are more sensitive to changes in US dollar liquidity.

After a rapid rise in the short term, the market will face pressure to correct, so in a sense, the current pullback can be seen as the market's self-regulation mechanism at work.

2

Is there still room for the Hong Kong stock market to move upwards?After a series of significant increases followed by substantial pullbacks, such market tremors are inevitably causing investor concern and indeed affecting sentiment.

As the Hong Kong stock market enters another period of volatility, amidst the "confusion" of the tug-of-war between bulls and bears, we must return to examining the fundamentals of businesses at the molecular level, exchange rates, and the risk-free interest rates at the denominator level.

Improvement in Corporate Profits and Steady Currency Appreciation

Looking at the exchange rate, under the expectation of the Federal Reserve's interest rate cut, the Chinese yuan has been gradually appreciating. The US dollar against the Chinese yuan has retreated from around 7.28 in late July to the current level of 7.07.

Under the backdrop of cost-reduction and efficiency-enhancing reforms, the performance of internet technology leaders with distinctive features and active trading in the Hong Kong stock market has shown a noticeable improvement. Judging from the semi-annual report data for 2024, companies like Meituan, Alibaba, Tencent, and Xiaomi have had many bright spots in their operations in the first half of the year, contributing significantly to the upward revision of profit expectations for related indices. Looking ahead, their performance is still considered relatively robust.

The real estate sector, which accounts for a significant portion of the Hang Seng Index, is also expected to recover after the relaxation of purchase restrictions in major domestic first-tier cities and the reduction of key policy interest rates.

Decrease in Risk-Free Interest Rates and Reduction in Liquidity Risks

Although the expected magnitude of the interest rate cut in November has decreased, in the medium to long term, as the Federal Reserve is in a rate-cutting cycle, the anchor of global asset pricing—the US 10-year Treasury bond rate—will continue to trend downward.

The interest rate cut is also beneficial for overseas funds to return to the Hong Kong stock market, further alleviating liquidity pressure.

Valuation Still AttractiveTaking the Hang Seng Technology Index, which represents the leading technology stocks in the Hong Kong stock market, as an example for analysis — after a recent significant surge, the index has risen by slightly over 40% in the past year as of October 7th, which still has a considerable gap compared to the average increase of 111% for the "Fabulous Seven" of the US stock market last year.

Furthermore, after the continuous surge, the current valuation of the Hang Seng Technology Index (PE-TTM) is only 26.51 times, placing it at around the 43% percentile over the past three years. In the meantime, the valuation of the US stock market's Nasdaq 100 Index (PE-TTM) is 36.3 times, with a percentile around 92% over the same period; the Nasdaq Index valuation (PE-TTM) is 44.21, with a percentile around 98.1% over the past three years. (Data source: Wind, as of 2024.10.14)

Compared to the main stock markets globally, the Chinese market currently has a more significant advantage, especially the Hong Kong stock market, where the mid-year profit growth and ROETTM continue to rise, and the valuation level still has certain attractiveness, which is expected to attract foreign capital to flow in continuously from markets with higher valuations.

3

What is the recent outlook for Hong Kong stock allocation?

Regarding the current allocation strategy for Hong Kong stocks, institutional expectations are generally optimistic ——

CITIC Securities believes that despite a rapid increase, the current valuation level of Hong Kong stocks is still at a position with high cost-performance ratio when compared to the global market or historical situations, especially the growth and large financial sectors, which are at a lower historical percentile in valuation. It is too early to say that Hong Kong stocks have reached a stage top, and their valuation repair market is expected to continue until early November.

Ping An Securities believes that the current focus on Hong Kong stocks should be on three main lines: 1) sectors that directly benefit from this round of policy, such as consumer goods, large finance (insurance, banking, securities), and real estate; 2) the highly elastic internet sector, which is usually the most directly benefited from capital inflow, and the sector has performed well in the mid-year report, with a focus on internet leaders; 3) the biopharmaceutical sector with good growth potential and sensitive to interest rates.

Guosen Securities believes that at the industry level, focus can be placed on: 1) Hang Seng Technology: Internet companies have performed well in the mid-year report, and leading companies continue to repurchase, increasing the proportion of shareholder returns. Hang Seng Technology also has the largest proportion of performance revisions in key indices; 2) Innovative drugs, finance, high dividends: Innovative drugs, large finance (insurance, securities, banking), and high dividends have a larger proportion of mid-year report performance revisions. Among them, innovative drugs are sectors with good growth potential and are also worth focusing on, while securities and insurance represent the beta of the market, with elasticity superior to the market during the rise.

Amid the reversal of global capital underweighting, policy intensification driving expectations to shift, overseas macro liquidity improvement, and continuous buying by domestic capital, among other favorable factors, we believe that Hong Kong stocks are still worth looking forward to.For those who are optimistic about investment opportunities in Hong Kong stocks, it might be worthwhile to consider a barbell strategy for allocation. On one hand, focus on technology growth to capture sectors that are more sensitive to interest rates during a rate-cutting cycle. On the other hand, seek high dividend stocks for a consistent and stable return on the safety margin. This combination could still prove effective.

Although there are many Chinese companies in the Hong Kong stock market, it is quite different from the mainland A-share market in terms of market structure, sources of liquidity, and market systems. For individual investors, the Hong Kong stock market is actually a market with a higher research difficulty and a higher participation threshold. Therefore, interested friends might consider using ETFs to invest in Hong Kong stock assets.

Hang Seng Technology Index ETF (513180)

High elasticity, high growth, and an "urgent pioneer" in market offensives, focusing on popular concepts such as platform economy, artificial intelligence, new forces in car manufacturing, and semiconductor chips.

Hang Seng Dividend ETF (159726)

Low valuation, high dividend, and triple catalyst of China's special valuation, focusing on sectors such as banking, public utilities, oil and gas, insurance, and coal.

Hang Seng ETF (159920)

Focuses on the core assets of Hong Kong stocks, with an emphasis on technology, finance, and real estate, and has strong advantages in high dividends and high dividends. It has a certain defensiveness during periods of reduced market risk preference.