China Galaxy Securities: Hong Kong stocks are expected to fluctuate upward by 2025, with the technology sector still offering relatively high investment opportunities.

China Galaxy Securities released a research report stating that overall, Hong Kong stocks are expected to trend higher in wide fluctuations by 2025. From a fundamental perspective, with the support of a package of existing and incremental policies, the profit potential of Hong Kong stocks is expected to grow. In terms of liquidity, overseas liquidity is suppressed by the Fed's easing of interest rate hikes. At the same time, if Trump implements a hard trade policy after taking office, foreign capital may flow out of the Hong Kong stock market due to a decrease in risk appetite. Domestically, the monetary policy will be "moderately loose," and Southbound funds are expected to accelerate into the Hong Kong stock market. In terms of valuation, Hong Kong stock valuations are at relatively low levels, making them attractive with a high long-term allocation value. In terms of allocation, first, under the stimulus of domestic expansion of domestic demand and stable consumption policies, Hong Kong stocks in the consumer sector with relatively low valuations are expected to rise. Second, the technology sector still has high investment opportunities, especially in areas such as artificial intelligence, consumer electronics, and semiconductors. The importance of China's domestically controllable logic in technology has increased after Trump's election. Meanwhile, the importance of new quality productivity in China's economic development is increasing, supported by a stronger policy. Third, under the disturbance of uncertain factors overseas, Hong Kong stocks' high dividend strategy remains attractive, especially for centrally-controlled high dividend targets actively managing market capitalization. Key Points: Hong Kong stock performance: (1) In 2024H1, total Hong Kong stocks' operating income increased by 2.82% year-on-year, with growth rates 1.48 percentage points higher than the 2023 annual report. In 2024H1, total Hong Kong stocks' net profit attributable to shareholders increased by 4.01% year-on-year, with growth rates 1.38 percentage points higher than the 2023 annual report. (2) It is expected that in 2025, overall policies will be positive, with a greater leverage force from central authorities and increased efforts to expand domestic demand and boost consumption policies, which is expected to drive the performance of listed companies. According to Bloomberg's consensus expectations, the per-share pre-projection earnings (positive) of the Hang Seng Index, Hang Seng Technology Index, and Hang Seng H-Share Index ETF are expected to increase by 5.33%, 19.83%, and 5.62% respectively compared to the previous year. Hong Kong stock liquidity: (1) As of December 13, 2024, among the intermediary institutions in the Hong Kong stock market, the market value of shares held by Hong Kong Stock Connect, Chinese intermediary institutions, local Hong Kong intermediary institutions, and international intermediary institutions accounted for 9.9%, 8.3%, 3.1%, and 43.2% respectively, with the percentages rising by 2.68 percentage points, decreasing by 0.18 percentage points, decreasing by 0.04 percentage points, and decreasing by 0.84 percentage points respectively compared to the end of 2023. This shows that the Hong Kong Stock Connect has taken over most of the stocks sold by foreign investors. (2) Looking ahead to 2025, the US economy and inflation are slowing down slower than expected, and the labor market remains resilient, leading to a slowdown or delay in the Fed's interest rate cuts. As an offshore market, Hong Kong stocks' liquidity is constrained by the pace of Fed interest rate cuts, and outflows of foreign capital may put pressure on the Hong Kong stock market. In 2025, a moderately loose monetary policy will be implemented domestically, which is expected to bring in incremental funds for Hong Kong stocks. Hong Kong stock valuation levels: (1) Hong Kong stocks are relatively undervalued compared to global equity indices, making them attractive. As of December 13, the PE ratio of the Hang Seng Index was only 9.04 times, at the 22nd percentile since 2010. (2) On December 13, the yield on 10-year US Treasury bonds was 4.40%, and the risk premium rate of the Hang Seng Index reached 6.64%, at the 33rd percentile since 2010. For overseas investors, the advantage of Hong Kong stocks in terms of the stock-bond ratio dimension is not significant. The yield on 10-year Chinese government bonds was 1.7771%, so the risk premium rate of the Hang Seng Index reached 9.26%, at the 95th percentile since 2010, showing that Hong Kong stocks have a relatively large investment advantage compared to 10-year Chinese government bonds. Investment strategy for Hong Kong stocks in 2025: Overall, Hong Kong stocks are expected to trend higher in wide fluctuations in 2025. From a fundamental perspective, with the support of a package of existing and incremental policies, the profit potential of Hong Kong stocks is expected to grow. In terms of liquidity, overseas liquidity is suppressed by the Fed's easing of interest rate hikes. At the same time, if Trump implements a hard trade policy after taking office, foreign capital may flow out of the Hong Kong stock market due to a decrease in risk appetite. Domestically, the monetary policy will be "moderately loose," and Southbound funds are expected to accelerate into the Hong Kong stock market. In terms of valuation, Hong Kong stock valuations are at relatively low levels, making them attractive with a high long-term allocation value. In terms of allocation, first, under the stimulus of domestic expansion of domestic demand and stable consumption policies, Hong Kong stocks in the consumer sector with relatively low valuations are expected to rise. Second, the technology sector still has high investment opportunities, especially in areas such as artificial intelligence, consumer electronics, and semiconductors. The importance of China's domestically controllable logic in technology has increased after Trump's election. Meanwhile, the importance of new quality productivity in China's economic development is increasing, supported by a stronger policy. Third, under the disturbance of uncertain factors overseas, Hong Kong stocks' high dividend strategy remains attractive, especially for centrally-controlled high dividend targets actively managing market capitalization. Specifically, considering factors such as valuation levels, dividend capacity, performance growth rates, and investor positions, it is estimated that the top three industries in terms of investment value in the Hang Seng Comprehensive Industry Index in 2025 are non-essential consumption, utilities, and information technology. Risk alerts: Risks include domestic policy intensity and effectiveness falling short of expectations, overseas interest rate cuts being less than expected, geopolitical disturbances, and unstable market sentiment.