Haitong: The expected volatility of the Hang Seng Index has been continuously increasing since the end of January. The market still has room for further upward adjustments.

Haitong released a research report stating that in February, the Hong Kong stock market led the gains, mainly due to the frequent catalytic events in the technology stocks, improved liquidity, and expectations of policy support from the two sessions. Looking at valuation, trading, and risk indicators, the trading sentiment of the Hong Kong stock market has significantly improved compared to earlier periods, but it is still not high compared to overseas valuations. From a risk preference perspective, the risk premium of Hong Kong stocks has recovered to historically high levels, with the Hang Seng Index expected volatility rising since the end of January, but still below last year's peak. This shows that investors still expect further increases. In terms of capital flow, this round of Hong Kong stock market rally is mainly driven by southbound funds, with foreign funds also returning in stages, and there may still be room for inflows in the future. Haitong's main points are as follows: Market review: In February, major stock indices worldwide showed mixed movements, with overall gains in the Hong Kong stock market In the A-share market, the Shanghai and Shenzhen 300 Index recorded a cumulative increase of 15.6% in February, with a maximum increase of 19.1%; the ChiNext Index recorded a cumulative increase of 111.2%, with a maximum increase of 5.2%; for the Hong Kong stock market, the Hang Seng Index recorded a cumulative increase of 121.8% in February, with a maximum increase of 13.4%, while the Hang Seng Technology Index recorded a cumulative increase of 133.1%, with a maximum increase of 17.9%; in the US stock market, the S&P 500 Index recorded a cumulative decrease of 5.0% in February, with a maximum decrease of 1.4%; the Nasdaq Index recorded a cumulative decrease of 8.6%, with a maximum decrease of 4.0%; in other markets, the German DAX recorded a cumulative increase of 17.9%, with a maximum increase of 3.8%; the French CAC40 recorded a cumulative increase of 15.6%, with a maximum increase of 2.0%; the UK FTSE 100 recorded a cumulative increase of 13.5%, with a maximum increase of 1.6%; the Korea Composite Index recorded a cumulative increase of 0.6%, with a maximum increase of 10.0%; the Nikkei 225 Index recorded a cumulative decrease of 6.9% in February, with a maximum decrease of 6.1%. In terms of industry performance, the overall Hong Kong stock market saw gains in February, with the top three industries being healthcare (17.0%), telecom services (16.3%), and information technology (14.9%), while the only declining industry was energy (-5.1%). The trading sentiment in the current Hong Kong stock market has significantly improved compared to earlier periods and still has room for further increase. Looking at valuation, trading volume, and risk indicators, the trading sentiment in the current Hong Kong stock market has significantly improved compared to the beginning of the year, but some indicators are not yet at high historical levels, indicating that there is still room for further increase. In terms of valuation levels, compared to historical valuations of Hong Kong stocks, they have significantly improved, but compared to overseas valuations, they are still not high. The percentile of Hang Seng Index valuation is at a moderate level globally, while the valuation percentile of Hang Seng Technology Index is still low. Looking at trading sentiment, the trading volume of Hong Kong stocks has increased significantly, but this increase is not as significant as in A-shares in 2019. Short-selling sentiment in Hong Kong stocks has decreased but is still at an average level. From a risk preference perspective, the risk premium of Hong Kong stocks has recovered to historically high levels, with the Hang Seng Index expected volatility rising since the end of January, but still below last year's peak, indicating that investors still expect further increases. This round of Hong Kong stock market rally is mainly driven by southbound funds, and foreign funds are also returning in stages. In addition to indicators such as valuation, trading volume, and risk preference, the direction of capital flow is also an important reference dimension for measuring market sentiment. Regarding the Hong Kong Stock Connect: since the start of the Hong Kong stock market rally in mid-January, funds from the Hong Kong Stock Connect have been flowing in rapidly, with a total inflow of approximately HK$200 billion from January 15 to March 14, becoming the core support for this round of rally. Trading-type foreign funds: since the start of the rally, the outflow of trading-type foreign funds has significantly narrowed, with net inflows exceeding HK$10 billion for two consecutive weeks from February 22 to March 4 and from March 5 to March 11. The recent trend of inflows has slightly slowed down. Stable-type foreign funds: since the start of the rally, stable-type foreign funds have overall net outflows, but there has been a narrowing of outflows after the Spring Festival, and even a temporary shift to net inflows. From February 15 to March 18, stable-type foreign funds had a total net inflow of approximately HK$10 billion. Looking ahead, the comparative advantage of Hong Kong stocks is likely to attract further inflows through the Hong Kong Stock Connect; with the improvement of macroeconomic conditions in China and the recovery of the A-share market, incremental foreign funds may continue to flow into the Chinese market. Risk warning Unexpected interest rate cuts by the Federal Reserve, policy uncertainties in the United States, and domestic economic data falling short of expectations.