JP Morgan Hong Kong Stock Market Outlook for the second half of 2025: Moving forward on the path of further reassessment (with a list of preferred stocks)

JPMorgan released a research report stating that the target for the Hang Seng Index at the end of 2025 has been revised to 13,000/14,000/11,000 Hong Kong dollars (HKD) for the benchmark/optimistic/pessimistic scenarios, with corresponding return rates of 2%/10%/-14%. Preferred stocks include AIA (01299), BOC HONG KONG (02388), GALAXY ENT (00027), HKEX (00388), LINK REIT (00823), and TECHTRONIC IND (00669). The Hong Kong stock market showed strong performance in the first half of the year, with record-breaking stock returns and financing activities in the first half of 2025 driven by moderate economic expansion and EPS upgrades. Key thematic stock selection opportunities focus on stablecoin licensing, development of the northern metropolitan area of Hong Kong, and the attractiveness of local high dividend stocks in a low yield environment. Key points from JP Morgan include: Index targets: The benchmark/optimistic/pessimistic targets for the Hang Seng Index by the end of 2025 have been raised from the previous levels of 11,600/12,400/10,300 HKD to 13,000/14,000/11,000 HKD, with corresponding return rates of 2%/10%/-14%. Industry allocation: Overweight in financial stocks/non-essential consumer goods stocks, with real estate stocks upgraded to neutral and utility stocks maintained at underweight. Preferred stocks: AIA, BOC HONG KONG, GALAXY ENT, HKEX, LINK REIT, and TECHTRONIC IND. Preferred small and mid-cap stocks: MGM CHINA and CHINA STATE CON. The record-breaking stock returns and financing activities in the first half of 2025 were supported by moderate economic expansion and EPS upgrades. Hong Kong saw its highest total IPO/stock placement amount in the first half of 2025 reaching 107 billion/174 billion HKD (14 billion/22 billion USD), the highest since 2021. With the help of a weakening US dollar and low Hong Kong Interbank Offered Rate (HIBOR), residential property prices in Hong Kong stabilized in the second quarter of 2025, with year-on-year retail sales growth in May. As expected, JP Morgan's Hong Kong Quarterly Macro Index (QMI) in June 2025 moved from a slowdown range to an expansion range, with consensual Forward Twelve Months (FTM) EPS for the Hang Seng Index rising 7% since October 2024. The estimated year-on-year EPS growth rates for 2025/26 are 7.7%/7.3% respectively, despite the drag from the utility and real estate sectors, the upward revision in the financial sector (accounting for 52% of the Hang Seng Index market cap) played a driving role. The inclusion of a RMB-HKD dual counter in the Stock Connect Scheme may boost southbound fund flows, combined with relative historical valuation discounts in the Asia-Pacific region. Southbound fund net inflows reached 778 billion HKD (100 billion USD) this year, accounting for 23% of total Hong Kong stock trading volumes. The inclusion of a RMB-HKD dual counter in the Stock Connect Scheme will lower trading costs and increase mainland investors' demand for purchasing Hong Kong stocks in RMB. As of July 16, the average percentage of eligible Hang Seng Index component stocks held by southbound funds was 2.4%, only a small fraction of the average holding percentage of all southbound investable targets, which was 19.7%. Currently, the Hang Seng Index's Forward Twelve Months Price-to-Earnings ratio is 14 times, 0.5 standard deviations below its ten-year average, making it the most discounted market in the Asia-Pacific region except for ASEAN. The beneficial factors of low HIBOR and a weakening US dollar in the first half of 2025 may weaken in the second half. JP Morgan predicts that the 3-month HIBOR will rise to 2-2.5% in the second half of 2025, up 0-50 basis points from the current 2.0%, and the US dollar index could drop to 94.7 by the end of 2025, a decrease of approximately 4% from the current level. During periods when the 1-month HIBOR fell by more than 1.5%, the Hang Seng Index rose by an average of about 14%; in periods when the US dollar index fell by more than 5%, the Hang Seng Index rose by an average of about 20%. Thematic stock selections include: (1) Stablecoins: Hong Kong is expected to issue stablecoin licenses in August, which may identify relative winners in cryptocurrency trading platforms and stablecoin issuers while curbing market enthusiasm: Futu and ZA ONLINE. (2) The theme of development in the northern metropolitan area of Hong Kong has gradually diminished. If it receives renewed attention, within our coverage, HENDERSON LAND and CHINA STATE CON have the highest relevance to this growth area. (3) Local high dividend stocks in a low yield environment may see increased capital inflows domestically.