Huatai Securities: Hong Kong stocks may still be driven by many technology and consumer main themes before and after the Spring Festival. Recommended to maintain balanced allocation and hold stocks during the holiday.

Huatai Securities Research Report states that Hong Kong stocks fluctuated last week alongside global risk assets. The global software industry experienced a correction, controversies arose over subsidies for tech giants entering the Hong Kong market, the US dollar rebounded, and the ripple effects from commodity markets persisted, all leading to increased daily and intraday volatility. However, liquidity remains relatively ample, with continued significant inflows from foreign and southbound investors into the Hong Kong market, driving notable strength in traditional sectors such as agriculture, forestry, animal husbandry, fishery, food and beverages, and transportation. Looking ahead, the peak earnings period for US tech stocks is nearing its end, gold and other precious metals are expected to see reduced volatility, and around the Spring Festival, there may still be numerous catalysts in technology and consumer sectors. We recommend balanced allocation and holding stocks through the holiday, with a focus on sectors where negative factors are already priced in, such as semiconductors, niche consumption with ongoing recovery at low levels, real estate chains, and innovative pharmaceuticals α. Our medium-term allocation view remains unchanged: after stabilization, continue to accumulate resource stocks, overweight insurance and Hong Kong local stocks.

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Huatai | Hong Kong Stock Strategy: Technology and Consumer Sectors May Receive New Catalysts During the Holiday

Hong Kong stocks last week fluctuated alongside global risk assets. The global software sector experienced a correction, controversies emerged over subsidies for tech giants entering the Hong Kong market, the US dollar rebounded, and the ripple effects from commodity markets persisted, all contributing to increased market volatility both during the day and intraday. Nonetheless, liquidity remains relatively abundant, with continued large inflows from foreign and southbound investors into the Hong Kong market, driving significant gains in traditional sectors such as agriculture, forestry, animal husbandry, fishery, food and beverages, and transportation. Looking forward, the peak earnings season for US tech stocks is approaching its end, gold and other precious metals are likely to see decreased volatility, and around the Spring Festival, there may still be numerous catalysts in technology and consumer sectors. We suggest balanced allocation and holding stocks through the holiday, with particular attention to sectors where negative factors are already priced in, such as semiconductors, niche consumption with ongoing recovery at low levels, real estate chains, and innovative pharmaceuticals α. Our medium-term allocation stance remains unchanged: after stabilization, continue to accumulate resource stocks, overweight insurance and Hong Kong local stocks.

Core Views

Fundamentals: Non-financial profit expectations continue to be upwardly revised, with pharmaceuticals and real estate leading the revisions.

Consensus Expectations: Overall, over the past four weeks, Bloomberg consensus profit and revenue expectations for non-financials have been upwardly revised by 0.6% and 0.1%, respectively; over the past week, revisions were 0.1% and 0.1%. Sector-wise, the sectors with the largest upward revisions in profit expectations over the past four weeks and the past week include semiconductors (4.8%/1.5%), pharmaceuticals (1.9%/1.2%), and real estate (0.7%/0.9%). Among these, pharmaceuticals and real estate also saw significant upward revisions in revenue expectations. Last week’s top performers in excess returns saw profit expectation revisions of 1.0% over four weeks and 0.4% over one week, while food and beverage sectors saw profit expectation downgrades of 0.4% and 1.1%, respectively.

Liquidity: Foreign Capital Continues to Inflow, Southbound Investment Accelerates

Foreign investment, as of Wednesday according to EPFR data, shows a net inflow of $1.88 billion into Hong Kong stocks (vs. $2.80 billion in the previous week), with active foreign funds net buying $420 million and passive funds net buying $1.47 billion, both remaining high. Southbound inflows last week reached HKD 56 billion, a significant increase from HKD 2.7 billion the previous week. The sectors with the largest net inflows include media, real estate, non-bank financials, transportation, and banking, while sectors like non-ferrous metals, electronics, and pharmaceuticals experienced net outflows. Regarding short positions, our latest calculations show the Hong Kong stock short interest ratio at 2.3%, with a trading ratio of 12%, up 0.11 and 2.5 percentage points respectively, indicating that short positions have increased again after a brief short squeeze.

Market Sentiment: Still Optimistic, No Clear Position Adjustment After Recent Correction

As of Friday, the Hong Kong stock sentiment index stood at 63.8, remaining in the optimistic range. The inflow of southbound funds, buying intensity, and the A/H premium scores have all further improved (from 23/17/56 to 63/56/68), returning to optimistic levels. Derivative indicators show a slight unwinding of the Hang Seng Index’s premium/discount, and the pace of increase in put/call option positions has slowed. These sentiment indicators reflect real trading and positioning, which do not always align perfectly with market trends. Despite recent large fluctuations, market sentiment remains optimistic, possibly indicating limited repositioning during volatile periods. Since the issuance of our timing strategy in September 2024, the out-of-sample pure bullish strategy has achieved an annualized excess return of 9.8%, and the long-short strategy has achieved an annualized excess return of 19.8%, demonstrating effective timing.

In Hong Kong IPOs, based on our previous IPO model, five stocks recently listed that meet the model criteria, with Aixin YuanZhi, Lead Intelligent, and Lankei Technology scoring highly.

Allocation: Post-Risk Pricing Focus on Semiconductors, Improving Niche Consumption, Real Estate Chains, etc.

In the short term, the AI sector has faced three risk adjustments: 1) the divergence between Capex and revenue/profit growth of US tech giants, with sustained Capex; 2) domestic AI giants increasing subsidies to compete for traffic, potentially diverting R&D Capex; 3) revisions to the easing of overseas liquidity expectations. As US tech earnings reports are largely disclosed, domestic giants’ subsidies are implemented, and expectations of easing are nearing their end, focus on hardware sectors like semiconductors with continued performance improvement. The trend of innovative pharmaceuticals remains strong, but with potential pressure on shareholding structures, presenting more α opportunities. Sectors with ongoing recovery, such as niche consumption and real estate chains, still have room for repair. From a medium-term perspective, continue overweight resource stocks (moderate accumulation after stabilization), insurance, and Hong Kong local stocks.

Risk Warning: Geopolitical volatility and policy measures falling short of expectations.

(Source: Yicai)