Huatai | Hong Kong Stock Strategy: Focus on Supply Chain and Cash Flow Stability

(Source: Haitai Ruishe)

Choppy consolidation is the market’s baseline tone at this stage. On the one hand, uncertainty from the Middle East conflict still remains; unlocking upside room for the market requires waiting, and changes in shipping/air transit conditions as well as expectations of Federal Reserve rate cuts are the key items to track. On the other hand, our Hong Kong stock sentiment index has been operating in the panic range for some time, and the downside risk to the market has been gradually released. Focusing on structure is the key priority at this stage, and we have two recommendations. First, the market’s pricing of growth downgrades may still be insufficient; therefore, continue to maintain a defensive exposure, with a focus on operational dividend-style assets, such as banks, railways, highways, and Hong Kong local public utilities. For cyclical dividend-style assets like oil and gas, pay attention to the risks of crowding and rising volatility. Second, rebalance and optimize the position structure along internal and external demand. Reduce allocations to optional products with larger exposure to revenue and supply chains in the Asia-Europe region, such as consumer electronics. Continue to hold China’s midstream manufacturing and broad energy-chain advantages, where mid-term external demand may not decline but could rise instead. Increase allocations to a portion of chips that have cleared the market and where expectations for downgrades are relatively fully priced, such as dairy products.

Fundamentals: Non-financial CY25 earnings growth is 3.5%, with high differentiation; overall, the upside surprise factor is effective

As of April 6, 2026, the market-cap disclosure ratio for non-financial CY25 earnings of Hong Kong-listed stocks reached 98.4%. Overall, CY25 earnings growth is 3.5%, with the proportion of upside surprises at 17%. Among the T+1 excess returns of stocks that beat earnings, the median is +0.8%, and for T+5 it further expands to +3.3%. The earnings upside-surprise factor is basically effective. Looking at the ETF segments, for innovative drugs, CY25 earnings growth is 21.5%; the proportion of earnings beats is 28.6%; the median T+1 excess return is +2.5%, and for T+5 it further increases to +9.8%, with the market concentrating its valuation during the earnings season on improving fundamentals. For internet CY25, the earnings beat proportion reaches 43.5%, but the market reaction is negative; the median T+1 excess return is -2.7%. On the one hand, some leading companies’ CY25 earnings growth drag is relatively large, and after stepping up AI Capex, internet NTM earnings expectations over the past roughly four weeks have been clearly downgraded (-6.9%). By industry, pharmaceuticals have optimistic fundamentals valuation; media has a high earnings-beat share but excess returns respond negatively, and investors lack confidence in forward earnings performance.

Liquidity: Foreign capital turns to net outflows, and Southbound net inflows slow down

Regarding foreign capital: as of Wednesday, under the EPFR framework, foreign capital net outflows from Hong Kong equities were $850 million (net inflows of $330 million in the prior week). Of this, active foreign capital saw net outflows of $90 million, and passive foreign capital saw net outflows of $760 million. For short-selling, in the latest period the Hong Kong short-selling trading/short-selling position ratios moved to +1.0pct/+0.03pct to 15.1%/2.43% respectively, overall slightly higher. For Southbound: last week Southbound net inflows to Hong Kong equities were HK$5.37 billion, down from HK$25.15 billion net inflows in the prior week. Banks, pharmaceuticals, automobiles, media, non-ferrous metals, and other sectors ranked among the top in net inflows.

Market sentiment: Maintain the panic range; still in the left-side window

The latest reading of the Hong Kong stock sentiment index is 28.6. After the index first touched the panic range on March 26, it is still staying in the panic range. In terms of attribution, the inflow intensity and net-buying intensity representing Southbound capital sentiment, as well as the extent of the rebound in the AH premium, are all limited. The futures/options scores representing foreign capital behavior moved from 16/0 to 26/0. From a fundamentals perspective, the gold implied exchange-rate spread and from a trading perspective, the turnover and Hang Seng volatility index appear relatively stable. The sentiment index has triggered panic seven times since 2024. The win rates and average price change amounts for T+14/T+21 are 86%/100% and 4.0%/3.8%, respectively. Since the timing strategy based on the Hong Kong stock sentiment index was released in September last year, the excess returns of pure long/long-short strategies are 9.1%/19.6%, with annualized excess returns of 15.8%/35.1%.

Allocation: While maintaining a defensive exposure, pay attention to relatively independent cyclical improvements and the rebalancing of internal and external demand

On the one hand, focus on low-volatility dividend-style exposures, such as banks, railways, highways, and Hong Kong utilities. On the other hand, rebalance along internal and external demand and adjust the structure in combination with financial report conditions. First, accumulate positions on dips in both new and old energy themes, but do not chase rallies; the logic for a mid- to long-term transformation is strong and has the highest level of consensus, and segment directions such as electrical and new energy (e.g., 电新) also have earnings expectations that are relatively already well priced. Second, reduce allocations modestly to optional products tied to external demand. Taking hardware equipment as an example: the 25-year industry earnings beat proportion is 29%, but excess returns are under pressure after results, reflecting that the market is pricing the downside risk for 2026. Third, modestly increase allocations to consumer demand driven by domestic demand. Chips are gradually clearing, and the pricing of downside earnings risk is also gradually in place; focus on essential consumption such as dairy products and seasoning products, as well as some service consumption. Innovative drugs, which are relatively independent of macro-driven improvement logic, offer an α opportunity. Hong Kong local stocks may still be a value-for-money core holding.

Risk warning: Volatility in geopolitical situations; policy support not as strong as expected.

CY25 Hong Kong stock earnings quick overview

Market performance

Valuation comparison

Hong Kong stock earnings

Hong Kong stock liquidity and market sentiment

Share buybacks, rights issues, IPOs, and listing unlocks

Risk warning

Risk of volatility in geopolitical situations: Geopolitical conflicts may suppress risk appetite, leading to foreign capital outflows and a sharp increase in market volatility, causing the market’s trend to differ from our views.

Risk of policy strength falling short of expectations: If subsequent market overheating causes relevant support policies to weaken, it may reverse the current upward valuation trend or compress trading activity, making the market’s trend differ from our views.

Related research reports

Research report: “Pay attention to supply-chain and cash-flow stability” April 6, 2026

Yi    Feng   Researcher SAC No. S0570520100005 SFC No. AMH263

Li YuJie Researcher SAC No. S0570525050001 SFC No. BRG962

Sun Hanwen Researcher SAC No. S0570524040002 SFC No. BVB302

He   Kang PhD Researcher SAC No. S0570520080004 SFC No.BRB318

Luan   Di Contact SAC No. S0570124120013

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