Guotai Junan: Domestic and foreign policies resonate and Hong Kong stocks will benefit from improvements in both the numerator and denominator.

Guotai Junan released a research report stating that Hong Kong stocks have already factored in too many pessimistic factors, showing clear signs of a bottom, and possessing high configuration cost-effectiveness. Overseas major central banks have successively started interest rate cuts, and the relaxation of external restrictive policies in the short term will help improve liquidity on the denominator side of Hong Kong stocks, providing positive support to Hong Kong stocks, with more price elasticity for interest rate-sensitive industries, including technology, pharmaceuticals, and consumer goods. In the medium to long term, as external restrictive monetary policies gradually loosen, the stabilization and appreciation of the RMB exchange rate, and further opening of domestic policy space are expected. With expectations of intensified economic support policies, Hong Kong stocks, which were excessively pessimistically priced at the denominator side, are expected to marginally improve. The expected return of the Hong Kong stock market in the next 3 years has increased significantly, highlighting the value of allocation. The main points of Guotai Junan are as follows: China has introduced a series of "stabilizing the economy" measures Today, the Governor of the People's Bank of China announced at a press conference that the interest rates on existing home loans would be reduced and the minimum down payment ratio for home loans would be standardized, guiding commercial banks to lower the interest rates on existing home loans to around the new rates for new home loans, with an estimated average decrease of about 0.5 percentage points. Positive events at home and abroad are coming to fruition, and there are clear signals of an upward trend in the Hong Kong stock market. Hong Kong stocks have risen significantly, reacting positively According to Guotai Junan's previous calculations, the average interest rate on existing home loans is around 4.10%. The latest interest rates for first-time home buyers in 30 cities are at 3.21%, and for second-time home buyers, it is 3.53%. If the average interest rate on existing home loans decreases by 0.5 percentage points, it will roughly be the same as the current interest rate for second-time home buyers. The convergence of mortgage rates and rental yield is a necessary condition for the stabilization of home prices, and the decrease in interest rates on existing home loans will help further stabilize current home prices. On the other hand, since the definition for first-time home buyers has been relaxed to a certain extent, the minimum down payment ratio for second-time home buyers has been reduced to 15%, which we believe still needs further observation for its stimulating effect on the market. However, overall, the market welcomes this relaxation of the policy. Hong Kong stocks have opened high, and the Hang Seng Index currently has a increase of over 2%. The unexpected interest rate cut by the Federal Reserve triggers a positive signal in the Hong Kong stock market On September 18, the Federal Reserve officially began an interest rate cut cycle, with a 50 basis point cut slightly exceeding market expectations; the next day, the Hong Kong Monetary Authority followed suit with a 50 basis point cut. Looking at the impact of past interest rate cuts on the Chinese Hong Kong market, the improvement in overseas liquidity expectations is conducive to supporting the rise of Hong Kong stocks from the denominator side. In addition, as major central banks overseas successively cut interest rates, the continuing relaxation of restrictive external policy environment, the continued appreciation of the RMB exchange rate, rising from 7.11 and once breaking through 7.04, and the expansion of domestic policy space. The warming of expectations for intensified economic support policies boosts market risk appetite and also helps improve expectations at the denominator side. Currently, there are clear signs of a bottom in the Hong Kong stock market, with low expectations corresponding to a healthy micro trading structure and high configuration value In terms of valuation levels, the current Hang Seng Index valuation is below the historical average standard deviation for the past 10 years, with a historical percentile of only around 12%. Compared with other major stock indices overseas, the valuations of developed or emerging market indices are mostly above 70%, while the valuation of the Hong Kong stock market is at a low point. The relatively low valuation of Hong Kong stocks is partly suppressed by the rapid interest rate hikes overseas in the past 3 years, and also reflects the pricing of Hong Kong stock earnings expectations. Currently, the micro trading structure of Hong Kong stocks is more healthy, with clear signs of a bottom. Learning from the experience of the Federal Reserve interest rate cuts in 2019, the Hong Kong stock market will be more optimistic this year The PMI for the manufacturing sector in the United States was 47 in September, marking the third consecutive month in the contraction zone and hitting a 15-month low; the expansion rate for the service sector has slightly slowed down, and it is expected that the Federal Reserve will continue to cut interest rates this year. The current round of Federal Reserve interest rate cuts is similar to the preventive interest rate cuts in 2019, with implications for the performance of Hong Kong stocks. The assessment of the economic situation in the United States in 2019 has not undergone significant changes, but it emphasizes the uncertainty of economic prospects, the need for preventive interest rate cuts to support avoiding an economic slowdown; the Hong Kong stock market shook downward, hit bottom after the Federal Reserve interest rate cuts, and rebounded. Compared to the performance of Hong Kong stocks in 2019, the price-earnings ratio of the Hang Seng Index is currently only 9 times (compared to 11 times in 2019), without high expectations or unexpected returns. Risk factors: The pace of domestic economic recovery is slower than expected; international geopolitical events escalate; repeated disturbances from overseas recession expectations.