GF Securities: Hong Kong stock market is still in the second stage of a bull market. Pay attention to these areas.

GF SEC released a research report stating that since mid-January, Hong Kong stocks have seen nearly seven consecutive gains triggered by the DeepSeek narrative of Chinese and American technology complementing each other, combined with easing global geopolitical tensions. The short-term market momentum in Hong Kong has been somewhat exhausted, but a temporary slowdown may result in a round shape. Based on historical experience, it is not advisable to chase the leading sectors after seven consecutive gains, but rather focus on sectors that have lagged behind in terms of low volatility, dividends, value, and quality factors such as banks, utilities, oil and petrochemicals, and telecom services. The main points of GF SEC are as follows: Since mid-January, Hong Kong stocks have seen nearly seven consecutive gains triggered by the DeepSeek narrative of Chinese and American technology complementing each other, combined with easing global geopolitical tensions. There are two main features of the market: (1) Global fund rebalancing - funds from developed stock markets are flowing into emerging stock markets, with flows within emerging markets transitioning to China with renewed technological competitiveness; (2) High market concentration - the gains are concentrated in leading technology stocks, similar to the concentration slope seen in the excess returns of Chinese internet giant NETDRAGON after the 2020 pandemic. The mid-term performance of the Hang Seng Index after seven consecutive weeks of gains is determined by profitability: historically, after six consecutive weekly gains, the Hang Seng Index entered a new period of strong upward profitability (driven by a four trillion stimulus driving continuous credit expansion), and Hong Kong stocks continued to rise within six months after six consecutive weekly gains. In this round, Hong Kong stocks are still in the second stage of a bull market leading global stock markets and driving A-shares. Looking ahead in the mid-term: The Hang Seng Index's longest consecutive gain record is eight weeks, so what are the odds/win rates for Hong Kong stocks after nearly seven consecutive weeks of gains? (1) Odds: Hong Kong stocks are now less attractive compared to A-shares. As of February 27th, the forward PE ratio of the Hang Seng Index is above the mean since 2010, and based on 10Y Chinese and US bond yields (Southbound proportion weighted), the Hang Seng Index's ERP is below the mean minus 1 standard deviation since 2010. (2) Win rate: Wait for the upcoming Two Sessions policies and peak season economic fundamentals to be verified. The short-term market momentum in Hong Kong has been somewhat exhausted, but a temporary slowdown may result in a round shape. Based on historical experience, it is not advisable to chase leading sectors after seven consecutive gains, but rather focus on sectors that have lagged behind in terms of low volatility, dividends, value, and quality factors such as banks, utilities, oil and petrochemicals, and telecom services. From a longer-term perspective, the sustainability of the current Chinese stock market trend driven by policy stimulus since September 24, 2024 is stronger. Considering that the valuation gap between Chinese and American technology stocks is still at a historical extreme, there is potential for further narrowing despite the significant short-term gains in Chinese technology stocks. In the long term, the market could experience three scenarios: (1) Comprehensive bull market: realization of AI technology industry narrative + domestic economic recovery; (2) Structural bull market: realization of AI technology industry narrative + domestic economic recovery with bumps; (3) Return to decline: failure to realize the AI technology industry narrative + bumps in domestic economic recovery. Global asset allocation recommendations: The anti-fragile barbell strategy consists of stable and robust assets on one end: (1) Bonds: In a period of debt reduction, Chinese government bond rates have adjusted and present a good opportunity for allocation; (2) Equity: In a period of debt reduction, strategically allocate to Chinese stocks in the barbell strategy (dividends + technology), as well as pan-Southeast Asian stock markets; (3) Alternatives: Gold with its super-national sovereign credit value is a necessary allocation to counter the new investment paradigm of deglobalization. On the other end, there are high-yield, high-volatility assets: seize the abundant opportunities in the US and Chinese AI industry chain infrastructure construction downstream software applications under the trend of the AI industry. Risk warnings: Domestic economic growth below expectations, geopolitical conflicts exceeding expectations, faster than expected global liquidity tightening, etc.