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 sector experienced a correction, controversies arose over subsidies for tech giants entering the Hong Kong market, the US dollar rebounded, and spillover effects from commodity markets persisted, all contributing 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 multiple catalysts from 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 fluctuated last week alongside global risk assets. The correction in the global software industry, controversies over subsidies for tech giants entering the Hong Kong market, the rebound of the US dollar, and lingering effects from commodity markets all led 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 period 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 multiple catalysts from 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, and over the past week by 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, revenue expectations for pharmaceuticals and real estate have also been revised upward with significant increases. Last week’s top-performing sectors in excess returns saw profit expectation revisions of 1.0%/0.4% over the past four weeks and the past week, respectively, while food and beverage sectors saw profit expectation downgrades of 0.4%/1.1%.

Liquidity: Foreign Capital Continues to Inflow, Southbound Investment Accelerates

Foreign investment: As of Wednesday, according to EPFR data, net foreign inflows into Hong Kong stocks amounted to $1.88 billion, compared to $2.80 billion in the previous week. Active foreign investment net inflows were $420 million, while passive inflows remained high at $1.47 billion. 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 included media, real estate, non-bank financials, transportation, and banking, while sectors such as 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 premium of A-H shares all further improved (rising from 23/17/56 to 63/56/68), returning to optimistic levels. Derivative indicators, such as the Hang Seng Index’s premium/discount and put-call ratios, showed slight reversion, with a slowdown in the pace of options position increases. Sentiment indicators reflect actual trading and positioning, which do not always align perfectly with market trends. Despite recent large fluctuations, market sentiment remains optimistic, suggesting limited repositioning during volatile periods. Our timing strategy, launched in September 2024, has achieved an annualized excess return of 9.8% for pure long strategies and 19.8% for long-short strategies, 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: Focus on Semiconductors, Featured Consumption with Improving Outlook, and Real Estate Chains After Risk Pricing

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 strong Capex; 2) domestic AI giants increasing subsidy-driven investments 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 innovative pharmaceutical industry trend remains strong, though shareholding structures may face pressure, presenting more alpha opportunities. Sectors with ongoing recovery, such as featured consumption and real estate chains, still have room for rebound. In the medium term, continue overweight resource stocks (moderate accumulation after stabilization), insurance, and Hong Kong local stocks.

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

(Source: Yicai)