CITIC SEC: How will the Federal Reserve's interest rate cut affect the Hong Kong stock market?

CITIC SEC released a research report stating that the expectation for a preemptive rate cut by the Federal Reserve in September has strengthened, highlighting the core asset allocation value of the Hong Kong stock market. The bank pointed out that historically, each rate cut by the Federal Reserve has significantly boosted short-term performance of the Hong Kong stock market. In terms of trends, aside from special circumstances in 2019 and 2020, Hong Kong stocks have performed well in the short term following rate cuts, while in the medium to long term, it is important to see whether the rate cuts effectively expand China's policy space. Looking ahead to this round, the bank expects the rate cut to still be preemptive, as the US job market is cooling down but the economy remains resilient, and the rate cut aims to address potential risks. Growth sectors such as technology, discretionary consumption, and healthcare are expected to benefit in the short term, while in the medium to long term, if China's policies cooperate to initiate simultaneous loosening with the US, it may attract inflows of foreign capital to the Hong Kong stock market. Currently, there is ample room for increased foreign investment, and with the backdrop of stable growth policies in China and a solid fundamental outlook, the core asset allocation value of Hong Kong stocks is prominent. Key points from CITIC SEC: As the September Federal Reserve meeting approaches, the market is increasingly focused on the potential impact of rate cuts. At the August 2025 Jackson Hole meeting, Powell made dovish remarks, emphasizing the need to adjust policy stance due to changing risk balance and rising risks of a downturn in the job market. This was interpreted by the market as a signal of an early rate cut by the Federal Reserve. Additionally, in August, the addition of non-farm jobs in the US was significantly lower than expected, with the unemployment rate rising from 4.248% in July to 4.324%, and indicators such as ADP and PMI employment sub-indices showing weakness across the board, indicating a continuing downward trend in the job market. As of September 12, CME shows that the market expects a 89% probability of a 25bps/50bps rate cut in September, with the market generally expecting the Fed to cut rates 2-3 times by 2025. The impact of the Federal Reserve rate cut on the capital market in Hong Kong - inflows of foreign capital are not inevitable. Reviewing 9 rate cut cycles since 1984, the bank divides them into 4 relief rate cuts and 5 preemptive rate cuts. Apart from the impact of the quick recovery from the shock brought by the COVID-19 pandemic in 2020, the average rate cut for the three relief rate cut cycles is 577bps, with an average duration of about 28 months; while except for the rate cut cycle in 1984, the other four preemptive rate cut cycles involve three rate cuts each (average 77bps), with an average duration of about one quarter. Foreign capital flows to China and emerging markets generally show a characteristic of "inflow before rate cut, uncertainty during the cycle, and reinflow after the end", with changes in capital flows mostly occurring during the process of expectation formation and adjustment. Specifically for Hong Kong stocks, there are differences in the impact of two types of rate cuts: 1) Under preemptive rate cuts, the US economy still retains resilience, and the expectation of economic improvement supports the US dollar, significantly suppressing the depreciation pressure on the US dollar that could result from loose liquidity. Foreign capital has not further flowed into China (as seen after the rate cut in September 2024, where foreign capital inflow to Hong Kong stocks did not fully recover); 2) In relief rate cuts, due to expectations of a weakened US economy and a weaker US dollar, capital may flow into Hong Kong stocks in the short term, but in the long term, under the influence of a decline in global risk appetite, it might withdraw (as seen after the rate cut in 2007, where capital flowed in and out). The impact of the Federal Reserve rate cut on the trend of Hong Kong stocks - driving short-term market movements, returning to fundamentals in the long term. The significant short-term boost effect of the Federal Reserve's rate cuts on Hong Kong stocks has been evident throughout history. Apart from the special circumstances in 2019 and 2020, most rate cut cycles have driven Hong Kong stocks to rise in the short term, with distinct characteristics based on the type of rate cut. In relief rate cuts, the performance of Hong Kong stocks tends to synchronize with the flow of foreign capital: at the beginning of the rate cuts in 2001 and 2007, the market rose with loose liquidity, but due to the weakening economic fundamentals, it experienced a decline in the mid-term, until the economy stabilized and rebounded gradually. In 2020, the rate cut exceeded expectations triggering panic, leading to short-term withdrawal of foreign capital and a decline in Hong Kong stocks. Under preemptive rate cuts, the trend of Hong Kong stocks often diverges from foreign capital flows, with the core drive being the broadening of China's policy space due to the rate cut: during the ASIA FINANCIAL crisis in 1998, the Federal Reserve's rate cut created a favorable environment for Hong Kong's financial defense; in 2024, the direct impact of the Federal Reserve rate cut was limited, with a combination of Chinese policies announced on September 24 becoming a key engine for the rise in Hong Kong stocks. It is expected that this round of rate cuts will still be preemptive, with a positive outlook for the core assets of Hong Kong stocks. The high probability of this round of Federal Reserve rate cuts continuing to be preemptive is due to signs of cooling in the US job market, while the economy remains resilient (unemployment rate is at a historical low, inflation has fallen and long-term expectations are stable, and GDP growth in the first half of the year remains steady). The rate cut is essentially a response to potential risks and aims to prevent economic recession. In the short term, looking at historical preemptive rate cut cycles, loose liquidity is expected to marginally boost Hong Kong stocks, with better performance in growth sectors such as technology, discretionary consumption, and healthcare. In the medium to long term, the core drive is the opening up of China's policy space, and if the Federal Reserve's rate cuts are combined with active fiscal and monetary policies in China, it may herald the first synchronized easing between the US and China since 2021, potentially attracting foreign capital inflows into Hong Kong stocks. EPFR data shows that since August, active foreign capital has continued to flow into China, marking the first long-term capital inflow since after September 24 last year, with noticeable increases in allocations from Europe and South Korea. As of July, the proportion of active foreign capital allocated to Chinese assets was only 7.0%, still underinvested by 6.1 percentage points compared to the global market value of Chinese assets, thus indicating ample room for increased foreign investment as China's stable growth policies are implemented and the fundamental outlook remains solid. Risk factors: Increasing tensions in the technology, trade, and financial sectors; Overseas central bank monetary loosening below expectations; Macroeconomic volatility in the US; Unexpected changes in export controls and tariff policies by the US and other relevant countries; Escalation of geopolitical conflicts.