CITIC SEC: The Hong Kong stock market will continue the reversal trend seen since 2024.

CITIC SEC released a research report stating that since the beginning of the year, there has been a daily net inflow of 6.8 billion Hong Kong dollars into Hong Kong stocks from the south. Despite recent signs of weakening economic fundamentals in the United States, overseas funds are expected to continue the trend of inflow into Hong Kong stocks that started on January 24th this year in the medium to long term. After this round of increase, the dynamic price-to-earnings ratios of the Hang Seng Index and Hang Seng Tech are only at historical percentiles of 45% and 31%, respectively. Coupled with upward revisions in performance expectations and high short selling ratios, the safety margin of Hong Kong stocks remains sufficient. Against the backdrop of continued catalyzation of AI narratives, improving fundamental expectations, and global fund rotation, despite short-term event disturbances, Hong Kong stocks are expected to continue the reversal trend that started in 2024. Event: On February 25th, concerns about the "United States Priority Investment Policy" memo and tariff issues led to a 5.2% drop in the overnight Nasdaq Golden Dragon Index, affecting the opening performance of Hong Kong stocks today. However, by midday closing, the decline in Hong Kong stocks had significantly narrowed. CITIC SEC believes that despite short-term event disturbances, against the backdrop of catalyzing AI narratives and continued global fund rotation towards Hong Kong stocks, the reversal trend that started in 2024 will continue. Trump signed the "United States Priority Investment Policy" memo, but it has no substantive impact. The memo aims to prevent investors from collaborating with specific countries in specific areas. The United States will expand the review power and jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to restrict investment activities related to Chinese individuals or entities in key areas such as US technology, critical infrastructure, agriculture, energy, raw materials, and other strategic areas. In addition, the memo also imposes more restrictions on US individuals or entities in their investment activities and methods in China. In terms of investment areas, it covers key areas such as semiconductors, artificial intelligence, quantum technology, biotechnology, hypersonic technology, aerospace, and advanced manufacturing; in terms of investment methods, it limits private equity, venture capital, greenfield investment, business expansion, and investment in listed securities; funding sources include pension funds, university endowments, and other limited partners. However, the memo signed by the Trump administration only has executive force within the executive branch and does not constitute a legally binding legislative action. Therefore, CITIC SEC believes that the memo will not have a substantive direct impact on global fund investments in Chinese companies. US technology stocks are under pressure, and the resumption of tariffs on Mexico also impacts investor sentiment. After news of Microsoft canceling some data center leases, US technology stocks came under pressure overnight, with all "Big Seven" companies except Apple falling. The Philadelphia Semiconductor Index also fell by 2.6%, reflecting US stock investors' concerns about the sustainability of capital expenditures in the AI sector. However, Microsoft later stated that its capital expenditure for this year would still reach $80 billion, and LSEG's consensus forecast shows that the combined year-on-year growth rate of capital expenditures for Amazon, Microsoft, Google, and Meta, the four hyperscalers, will reach 36.7%. Considering that the capital expenditure cycle for Chinese AI companies is later than that for US companies, and with the emergence of DeepSeek bringing huge potential application space domestically, CITIC SEC believes that concerns about US AI-related sectors will not continue to drag down the performance of Hong Kong technology stocks. On the contrary, given that Hong Kong technology stocks still have a 30% valuation discount compared to US technology stocks, Hong Kong stocks may continue to benefit in the medium to long term from funds flowing out of US stocks. In addition, overnight Trump proposed plans to proceed with plans to impose tariffs on Mexico and Canada, which also impacted investor sentiment in the US. However, as of 2023, the proportion of US/Americas revenue in Hong Kong stocks has dropped to a historical low of 1.7%, and in terms of fundamentals, the impact of tariffs on Hong Kong-listed Chinese stocks is limited. End of February MSCI quarterly rebalancing and Hang Seng Index component weight rebalancing on March 7th. From the last implementation day of MSCI's rebalancing in 2024 (November 26th) until February 21st, 2025, the Hang Seng Index has risen by 22.5%, and the Hang Seng Tech has risen by 38.8%. During the same period, the MSCI Global Index and Emerging Markets Index only rose by 1.8% and 5.6%, respectively. Due to over-allocation reasons, some passive funds may have cross-market rebalancing operations at the end of this month. Looking back at the adjustment period from August to November 2024, the performance of the Hong Kong stock market was significantly better than that of the MSCI indices (global and emerging markets). The market fell in the first two trading days before the adjustment period effective date, but then stabilized and rebounded. In addition, March 7 is also the day of constituent stock adjustment for the Hang Seng series indices. Due to the 8% weight limit for constituent stocks of the Hang Seng Index and Hang Seng Tech, stocks in both indices that have exceeded this limit due to recent significant gains may have their weight reduced by passive funds on the adjustment day. However, this adjustment has limited impact on the overall Hong Kong stock market, involving only weight rebalancing of index constituents and not involving funds flowing out of the Hong Kong stock market. The continued catalyzation of the AI narrative combined with the weakening of the US economy, global funds are expected to continue flowing into Hong Kong stocks. From the beginning of the year until February 24th, there has been a cumulative net inflow of 217.1 billion Hong Kong dollars into Hong Kong stocks from the south, with a daily inflow of 6.8 billion Hong Kong dollars, far exceeding the 3.5 billion Hong Kong dollars in 2024. In addition, from January 24th to February 14th, foreign capital estimated by CITIC SEC has also flowed back into Hong Kong stocks with 17.7 billion Hong Kong dollars, mainly flowing into the technology and consumer sectors. On the other hand, recent data on US consumer confidence, services PMI, and existing home sales have fallen short of expectations. Walmart's quarterly revenue growth rate has slowed to the lowest level since the first quarter of 2022, net profit has declined year-on-year, and the full-year guidance is below expectations. Until issues such as tariffs, inflation, and uncertainty about federal layoffs and spending cuts are clarified, concerns about the US economy and US stocks may persist. Since 2022, according to EPFR-caliber statistics, global passive funds have flowed into US stocks by $1.41 trillion, while active funds have flowed out by $486 billion. If the Russia-Ukraine issue is resolved, more funds may flow out of US stocks. Therefore, against the backdrop of the domestic AI narrative and economic recovery, global funds are expected to continue flowing into Hong Kong stocks. Hong Kong stocks have significant value, upward revisions in performance expectations, and sufficient safety margins, so it is expected that the reversal trend of the year will continue. Even after this round of increase in Hong Kong stocks, the current Hang Seng Index and Hang Seng has a dynamic PE ratio of only 45% and 31%, respectively. In addition, considering the continuously catalyzed AI narrative and the weakening US economy, global funds are expected to continue flowing into Hong Kong stocks.The dynamic PE ratios of the technology sector are 10.4 and 18.7 times, at historical percentiles of 44.8% and 30.7%. Performance expectations for the main Hong Kong stock indices in 2025 have shown an upward trend since the third quarter report. Since the end of November last year, Bloomberg's consensus expectations show that revenue and net profit expectations for Hong Kong Science and Tech in 2025 have been revised up by 7.7% and 6.2% respectively. In addition, as of February 21st, the unsettled short selling amount in the Hong Kong stock market accounted for 1.44% of the market capitalization, close to three times the historical average of 2023 above the standard deviation level; and the 3.6% dividend yield of the Hang Seng Index is also at the 61st percentile for the past decade. Overall, in the context of AI narratives continuing to drive, upward revisions in corporate fundamentals, and global fund rotation, despite short-term disturbances, CITIC SEC predicts that the Hong Kong stock market will continue the reversal trend since 2024."Bonjour, comment a va ?" "Hello, how are you?"