Guotai Haitong: Increased capital inflows + accumulation of high-quality assets, the adjusted bull market in Hong Kong stocks is still expected to continue.

Guotai Haitong Research Institute's overseas strategy research team released a research report stating that since October, Hong Kong stocks have entered a correction phase, mainly due to the large gains in the previous period and the tightness in US dollar liquidity, as well as the expectations for a decrease in interest rates by the Federal Reserve. It is normal for the market to experience adjustments in a bull market. Historically, under short-term emotional disturbances, small corrections in Hong Kong stocks averaged a 7% decline, while larger corrections due to tightening liquidity and external shocks averaged a 17% decline. The tightening of US dollar liquidity is only a short-term disturbance, the AI trend is not yet over, and the Hong Kong stock market rally driven by inflows of incremental funds and the convergence of high-quality assets is expected to continue. Where is the adjustment in Hong Kong stocks at Since the beginning of the year, Hong Kong stocks have performed well overall, with the Hang Seng Index and the Hang Seng Technology Index hitting new highs in early October. However, since mid-October, Hong Kong stocks have entered a correction phase, with the decline intensifying in the past week, with the Hang Seng Index falling by as much as 5.1% and the Hang Seng Technology Index by as much as 8.1%. At present, investors are very concerned about the timing and extent of the correction in Hong Kong stocks, and there are differing views on the future direction of Hong Kong stocks. This article reviews history to anticipate how the future of Hong Kong stocks may unfold. Since October, Hong Kong stocks have entered a period of volatile adjustments. Throughout the year, we have repeatedly stated in reports such as "Hong Kong stocks are the main battleground of this bull market - 20250607" that Hong Kong assets have unique advantages compared to A-shares, and are more aligned with current trends in industries such as AI, new consumerism, and innovative pharmaceuticals. Therefore, we continue to be bullish on the Hong Kong stock market, especially the investment opportunities in the Hang Seng Technology Index. In early October, the Hang Seng Index and the Hang Seng Technology Index both hit new highs for the year, with gains of 47% and 61% respectively. Subsequently, Hong Kong stocks gradually entered a correction phase, with the Hang Seng Index experiencing a maximum decline of 8% and the Hang Seng Technology Index a maximum decline of 20% to date. Behind the consolidation of Hong Kong stocks is the tightness in US dollar liquidity, a downturn in expectations for Federal Reserve interest rate cuts; and on the other hand, the significant gains in Hong Kong stocks in the previous period, as well as concerns about the AI bubble. 1. The tightness in US dollar liquidity and the reduced expectations for Fed interest rate cuts are suppressing the Hong Kong stock market. From early October to early November, the US government was shut down, causing a halt in government spending and resulting in a tight US dollar liquidity environment. Although the US government has now ended the shutdown, economic data such as non-farm payrolls and inflation continue to disappoint. Amid the data fog, the Federal Reserve's decision to cut interest rates is becoming more cautious, with the market now forecasting a 40% chance of a 25 basis point rate cut in December. Due to the tight US dollar liquidity environment, coupled with the reduced expectations for Fed rate cut, the US dollar index has risen significantly, putting pressure on the Hong Kong stock market. 2. Hong Kong stocks have seen significant gains in the previous period, with increased short-term concerns in the AI sector limiting market performance. As mentioned earlier, Hong Kong stocks have seen substantial gains since the beginning of the year, with sectors such as technology, new consumerism, and innovative pharmaceuticals showing impressive performances. The Hang Seng Technology Index has gained 61%, the Hang Seng Biotech Index has gained 130%, and the Hang Seng China New Consumer Index has gained 46% at the high point of the year. Subsequently, Hong Kong stocks have gradually entered a correction phase, with the Hang Seng Index experiencing a maximum decline of 8% and the Hang Seng Technology Index experiencing a maximum decline of 20%. Behind the consolidation of Hong Kong stocks is the tightness in US dollar liquidity and the reduced expectations for Federal Reserve interest rate cuts; and on the other hand, the significant gains in Hong Kong stocks in the previous period, as well as concerns about the AI bubble. In a bull market, market corrections are normal. Depending on the size of the adjustment during a bull market, we divide the corrections in the Hong Kong stock market into two categories: small corrections with an average maximum drop of about 7%, mainly due to short-term market sentiment disturbances; and large corrections with an average maximum drop of about 17%, mainly related to shifts in liquidity, sudden shocks, and other factors. In a bull market, the Hang Seng Index experiences an average maximum drop of about 7% during small corrections, which are usually rapid pullbacks after a period of rapid increase. Looking back at the six rounds of bull markets in the Hong Kong stock market, there have been a total of 42 small correction phases. In terms of space, the average maximum drop of the Hang Seng Index during small corrections is 6.5%, and for the Hang Seng Technology Index, it is 8.8%. In terms of duration, small corrections in bull markets typically last no longer than 30 trading days, with an average adjustment period of about 12 trading days. Small corrections generally occur after a period of rapid market rise, with triggers often being minor negative factors that do not alter the overall upward trend. For example, during the bull market in 2009, there were a total of 7 small correction phases, yet from March 9, 2009 to November 18, 2009, the Hang Seng Index still rose by 92%. In a bull market, the Hang Seng Index experiences an average maximum drop of about 17% during large corrections, which are usually related to tightening liquidity and substantial negative impacts. In the history of the six Hong Kong stock market bull markets, there have been a total of 20 large correction phases. Taking the Hang Seng Index as an example, in each major correction during a bull market, the average maximum drop is approximately 17%, with an average duration of about 53 trading days. The triggers for these significant declines in Hong Kong stocks are often related to tightening liquidity, substantial negative impacts, and other factors. For example, in 2013, when the U.S. Federal Reserve Chair first mentioned reducing the pace of asset purchases of U.S. Treasuries, the so-called "Taper Tantrum" caused the Hang Seng Index to drop by about 19% in 93 trading days. Similarly, in April 2025, due to the disturbance caused by the U.S. tariff policy exceeding expectations, the Hang Seng Index and the Hang Seng Technology Index both dropped by as much as 23% and 31% respectively in 23 trading days. The tightness in US dollar liquidity is only a short-term disturbance, the AI trend is not over, and the bullish trend of the Hong Kong stock market is expected to continue after the adjustment. The recent strength of the US dollar is mainly due to short-term liquidity factors, and the interest rate cut cycle is not over. The US government has now ended its shutdown, and the previously accumulated liquidity is gradually being released. In addition, in September, the U.S. unemployment rate slightly increased to 4.4%, indicating a continued slowdown in employment data, and a high probability that the Federal Reserve's interest rate cut cycle will be extended next year, which may provide support for the future trend of Hong Kong stocks. Both domestic and overseas technology companies continue to surpass expectations in their performance, and the AI industry cycle continues to be positive. Since November, major technology giants at home and abroad have successively released their performance results. Under the catalysis of generative AI, companies such as NVIDIA and TENCENT have shown continued positive trends in their performance, indicating a continued uptrend in the AI industry cycle. In the medium term, the Hong Kong stock market rally driven by inflows of incremental funds and the convergence of high-quality assets is expected to continue. If the short-term factors that are currently restricting Hong Kong stocks are alleviated, then in the medium term, Hong Kong stocks have clear incremental funds and have gathered high-quality scarce assets, which are expected to continue to support this round of bull market trends. 1. The scarcity of Hong Kong assets. China is at a critical juncture of transition from old to new growth drivers. Against the backdrop of a slowdown in macroeconomic growth domestically, domestic funds are facing asset shortage pressure. Despite the lack of upward elasticity at the macro level, profound changes are taking place at the industrial level. For example, a new wave of upwards cycles led by AI in our country is continuing to deepen. It can be seen that AI-related assets in Hong Kong, which are more in line with current industry trends, may have a competitive edge. 2. Southbound funds are expected to continue flowing in. Compared to A-shares, Hong Kong stocks have assets that are more scarce and are more relevant to current emerging industry trends. Although Hong Kong stocks have been in a consolidation phase recently, southbound funds have shown a trend of buying against the market, with over 1.3 trillion yuan flowing in so far this year. Looking ahead, with the push from institutions such as public funds and insurance funds, there may still be room for incremental southbound funds this year, which may further drive the upward trend of Hong Kong stocks. 3. Structurally, technology in the Hong Kong stock market continues to be the main theme under the drive of AI. The narrative of overseas "AI empowerment" is expected to gradually reflect in the domestic market, and the stabilization of Sino-US relations is helping to improve risk appetite in the Hong Kong stock market. In addition, the disturbance caused by the "subsidy war" among internet takeaway platforms on profit expectations may gradually fade away. Leading technology companies in Hong Kong have a certain advantage in this round of the AI wave and will fully benefit from the AI industry's transformation dividend. As the upward trend of the AI industry cycle is further confirmed, Hong Kong technology leaders are expected to regain their relative advantage in the fourth quarter. In addition, Hong Kong stocks benefit from policy strengthening dividends + low interest rates, and assets related to new consumption and innovative pharmaceuticals in Hong Kong are similarly scarce compared to A-shares and are also worth paying attention to in the second half of the year. Risk warning: Increased inflation pressure in the U.S., delay in Fed interest rate cuts; slow progress in large-scale commercial application of AI domestically.