Guosen Hong Kong Stock Market's 2026 Investment Strategy: Focus on the main line of AI applications and grasp the rotation rhythm of PPI-CPI.

Guosen released a research report stating that looking forward to 2026, based on the assumption of a soft landing in the US economy, the weakening of the independence of the Federal Reserve and employment pressure will strengthen the expectations of interest rate cuts. The economic weakening will also be offset by quick interest rate cuts, with gold and US stocks expected to outperform US bonds and cash. Domestically, with the low level of domestic bond rates and improvement in prices, A-shares still have considerable upside potential during the 15th five-year period, with a slow and long bull market expected, with a target of above 4450 points in 2026. Hong Kong stocks benefit from the transformation of pricing power of southbound funds, with a target range of 29000-32000 points in 2026. Key points from Guosen: Overseas: Based on the assumption of a soft landing in the US The conflicting attitude shown by the Federal Reserve during the interest rate cut in September indicates the beginning of its weakening independence. In addition to the change of leadership at the Federal Reserve in 2026 and the current situation of "K-shaped economy" and downward pressure on hourly wages affecting the lower class, employment pressure will strengthen the expectations of interest rate cuts. Economic weakening, or even shallow recession, will be supported by quick interest rate cuts. The sensitive period for the slowdown in AI investment is expected to be from the second half of 2026 to the first quarter of 2027. It is predicted that the overall performance of tech stocks in 2026 will be stable, but caution is needed against temporary disruptions caused by the unemployment rate rising above 4.5%. Gold and US stocks are favored over US bonds and cash. Domestic: Slow and long bull market aligns with China's long-term market positioning Strategically, information technology and consumption are promising sectors during the 15th five-year period. With domestic bond rates expected to be at 1.6-1.8% in 2026-2027, Guosen believes that with gradual improvements in PPI and CPI, A-shares still have considerable upside potential. Referring to the historical volatility comparison between China and the US, it is estimated that the target for A-shares in 2026 should be higher than 4450 points. Guosen uses gross profit margin, revenue growth rate, and profit growth rate to characterize the sector's prosperity, and in the prosperity-stock price matrix, the results displayed are similar to the trend of PPI to CPI rotation. Hong Kong stocks: Transition of pricing power of mainland funds After breaking out of the bottom in 2024, Hong Kong's market performance was impressive in 2025, with a year-on-year increase of over 30%. It is expected that southbound capital will have a net inflow of 1.4 trillion RMB throughout the year, setting a historical record. For the first time, the pricing power of southbound funds has had a qualitative impact on the valuation of Hong Kong stocks. Based on weighted risk premium calculations, Guosen has raised the target price range for Hong Kong stocks in 2026 to 29000-32000 points. Industry selection: 1. AI applications: Extra attention should be paid in 2026 as AI capabilities drive various applications. Scenarios could be widely distributed across internet/software, media, hardware equipment, semiconductors, automotive/parts, daily consumer retail, and optional consumer retail sectors. 2. PPI chain: Due to greater room for improvement in PPI in the first half of 2026 compared to CPI, this benefits the middle and upstream manufacturing industries with more certain price increases. This includes electrical equipment, defense industry, chemicals, machinery, non-ferrous metals, paper making, which can be summarized as anti-inner circulation. 3. Non-bank financial institutions: Hong Kong insurance and securities firms benefit from market prosperity, driven by investment from insurance and their main business, with sustained performance. 4. Pharmaceuticals and new consumption: Overall, the pharmaceutical industry is good and has experienced a period of pullback, while consumption has a significant degree of differentiation, with new consumption still outperforming traditional consumption. Guosen leans towards innovative drugs and new consumption in the first half of next year, while the overall strengthening of CPI may have to wait until the second half of 2026. 5. Cash flow portfolio: Through long-term observation, Guosen has found that Hong Kong's free cash flow portfolio consistently outperforms the market. With the long-term weakening of the US dollar and domestic bond yields remaining low, this combination has always exhibited outstanding performance. Risk warning: Uncertainty in US-China tariff policies, uncertainty in the extent of overseas interest rate cuts, geopolitical uncertainties, and uncertainties in the competitive landscape of certain industries.