CICC's 2025 Hong Kong Stock Outlook: Rebound is intermittent, structure is the main trend.

CICC releases research report, saying that in the baseline scenario, Hong Kong stocks have not completely escaped the volatile pattern. This is because the valuation and risk premium space is limited, and profit improvement requires greater stimulus. Therefore, stronger expectations at the index level need to be based on greater pressure. This is also the condition for the introduction of larger scale stimulus measures under the "stimulus" policy approach. However, the more thorough valuation and position clearing of Hong Kong stocks, as well as the better profit structure, make it easier to rebound under the right catalysts, and may also have more resilience compared to A-shares. Therefore, "the rebound is intermittent, the structure is the main theme", gradually building positions on the left side of the doldrums, and moderately taking profits on the right side when it is upbeat, seems to be a more effective strategy. Macro environment: The root cause of the problem is credit tightening, the solution lies in fiscal efforts, but high expectations are not realistic. The foundation of the market is profit, especially considering the limited valuation and risk premium space. From a macro perspective, all the problems such as declining demand, low inflation, weak credit, and weak profits are rooted in credit tightening. On one hand, the financing cost for the private sector is still generally higher than expected returns, leading to the private sector still deleveraging. According to CICC's calculation, there is still a 2.3 percentage point difference between the natural interest rate of 2.7% and the actual interest rate of 0.4%. The problem is also exacerbated by the "bifurcation" of financial resources access. On the other hand, the fiscal efforts that should act as a hedge are not fast enough and not substantial enough, and even turned into contraction in the second and third quarters, putting the whole economy in a "deleveraging" state, increasing inflationary pressures. The targeted solution: One is to continue to lower the actual financing cost. CICC's calculation shows that further lowering the 5-year LPR by 40-60bp can resolve the aforementioned inversion. However, factors such as bank interest spread, Renminbi exchange rate, Fed interest rate cuts, and policy constraints after the US election limit the short-term operational space and effectiveness. The other is to boost return expectations, which can be achieved by reawakening the private sector's leverage in the stock market and real estate, but the challenge lies in timing and the backlash after overextending expectations; a more effective method would be direct fiscal intervention, whether subsidizing companies and households indirectly by repaying debts and wages through bond issuance, or directly stimulating demand through trade-ins and birth subsidies, a substantial scale is necessary. CICC calculates that adding 7-8 trillion RMB in fiscal expenditure can match the current nominal growth rate of social financing needed, and even make up for the output gap since the epidemic. However, the "real constraints" of high leverage, interest rates, and exchange rates, as well as the policy "stimulus" response function, mean that there will be incremental stimulus, but high expectations are not realistic unless external pressures increase. This is fundamentally consistent with the cycle since 2018: external pressures increased stimulus market surge turns to volatility increased pressure increased stimulus. Market trend: Structure is the main theme, rebound is intermittent; has more advantages compared to A-shares Under the above macro assumptions, profit has a bottom but limited scope for increase, so the market has not completely escaped the volatile pattern. "The rebound is intermittent, the structure is the main theme", more similar to the weak balance under the structural bull market after the rebound in 2019. In the baseline scenario, CICC expects profit growth of 2-3% in 2025, similar to 2024, plus the full recovery of valuation and risk premium, hence, the index space is limited, corresponding to around 22,000 for the Hang Seng Index. In the optimistic scenario, a larger profit space (6-7%) could drive the index up by 10-15%, corresponding to around 24,000 for the Hang Seng Index, but this would require the larger fiscal stimulus mentioned earlier to achieve. The changes that break this weak balance in the future could come from external shocks such as tariffs, but considering the proactive policy stance, it is more comparable to the year after the epidemic in 2020, rather than the year of internal financial deleveraging pressure in 2018. CICC calculates that the negative impact on exports and growth brought by a comprehensive 60% tariff could require a large-scale incremental fiscal stimulus to offset, providing a possible path to a larger market space. However, from another perspective, in the process of economic restructuring, volatility is not necessarily a bad thing, and rapid surges are not necessarily good. Looking back at the past decade, a structural bull market that conforms to the policy direction and industrial trends can emerge from a volatile market (such as the smartphone industry from 2012-2014, the "new three items" after 2019), while forced rapid surges due to the need for more leverage support could lead to a longer period of doldrums after being overextended (such as in 2015, 2016-2017, 2021). Compared to A-shares, the advantages of Hong Kong stocks lie in lower valuation, foreign capital position reduction (currently underweight by nearly 1 percentage point), and better profit structure (profits and ROE in new economy sectors like the internet are generally better than traditional consumer and manufacturing sectors). Therefore, in the volatile pattern, CICC believes that Hong Kong stocks have more advantages, and underperformance risks come from an accelerated rise of large-scale stimuli. Allocation direction: Industry restructuring, policy support, stable returns; long-term focus on consumption and structural opportunities in overseas markets Under the benchmark assumption of an overall volatile pattern, gradually building positions on the left side of the doldrums, and shifting towards structure, seems to be a more effective strategy. In terms of industries, CICC recommends focusing on three structural categories: sectors undergoing industry supply and policy cycle clearances, with better effects if there is marginal demand improvement, including internet-related consumer services, household appliances, textiles and clothing, and electronics. Second, sectors with policy support, such as household appliances and cars under the "substitution for old products" program, and the industrial trends in the field of independent technology like computers and semiconductors; third, stable returns sectors like state-owned enterprises with high dividends. In the medium to long term, focus on new consumption trends in line with China's economic and demographic structural transformation, as well as opportunities in overseas markets, such as mid-range manufacturing (passenger cars, engineering machinery, batteries, electrical machinery, textile machinery, etc.), media, and new retail. Overall, CICC recommends overweighting information technology, internet growth, and some optional consumption, having a standard allocation for energy and finance, and underweighting real estate and some industrial sectors. CICC provides corresponding target screening in the original report.