CICC: Hang Seng Index's "benchmark" target for next year is between 28,000 and 29,000 points.

CICC released a research report stating that Hong Kong stocks have experienced a year of gains and are now in a completely different position compared to a year ago. The Hang Seng Index's dynamic valuation is 11.4 times, close to one standard deviation above the mean since 2015. The risk premium has even dipped below the low point of the "housing reform" cycle in early 2018, making it hard to define as "cheap". Considering the current level and the main characteristic of valuation contributions this year (contributing 30% of the rise in the Hang Seng Technology Index), the opening up of space at the index level in the future requires earnings recovery, and cannot solely rely on the unlimited expansion of valuation and risk premiums. Under the benchmark assumption, if the risk-free rate between China and the US (weighted by 35% according to the southward transaction ratio) drops from the current 3.4% to 3.1%, while sticking to the main theme of prosperity, especially if the risk premiums for sectors such as technology and the Internet return to the low point of the year, and other sectors remain near the average for this year, the corresponding valuation space is about 5-7%. Of course, under optimistic assumptions, if policy efforts drive up prices, cyclical sector sentiment will also be boosted. If other sectors including energy, banks, and real estate return to their lowest levels this year, and foreign capital inflow increases its southward proportion to 30%, the bank predicts that valuation is expected to open up more than 15% upside space. CICC calculates that under the benchmark scenario, Hong Kong stocks will see earnings growth of 3% in 2026 (6% in 2025, the current market expectation is 9-10%), with non-financial sectors growing by 6-7% (8% in 2025), and financial sectors expecting zero growth. Therefore, under the benchmark scenario, the space at the market index level is limited, and space comes from the structure of prosperity or unexpected pullbacks. Taking into account earnings, risk-free rates, and risk premiums, the bank calculates the midpoint of the Hang Seng Index to be between 28,000 and 29,000 points next year, around 31,000 points in the optimistic scenario, and around 21,000 points in the pessimistic scenario. The bank's allocation strategy focuses on being broad-minded and selective, seeking scarce assets for the next stage. On the one hand, from the perspective of asset pricing logic, the bank suggests that moderate allocation of dividend assets can still be maintained to cope with the weakness of overall credit cycle expansion. In other words, CICC believes that there is still a need for low Chinese government bond rates and loose monetary conditions. On the other hand, in an environment where overall credit expansion is weak, there is a greater need to continue expanding credit. The bank believes that this can be approached from three dimensions: industrial structure (such as AI technology), capacity clearance and mapping of overseas demand (emerging industrial chains and US demand), essentially following the direction of credit expansion, just from a different source. Overall, CICC recommends overweighting AI software and hardware (AI industry trends and overseas demand mapping), electronics (capacity clearance and overseas demand mapping), chemicals (capacity clearance and overseas demand mapping), home furnishings (capacity clearance and overseas demand mapping), and innovative drugs (industry trends and overseas demand mapping), and underweighting real estate, food retail, and personal care products. Of course, when it comes to specific allocations, it is necessary to consider valuation and crowding factors comprehensively in order to enter at a better cost. In addition, the bank expects China's PPI to rise in stages towards the end of this year and the first and second quarters next year, which could serve as an opportunity for the market to switch to a cyclical phase on the trading level.