Liquidity Disturbances Ease; Institutions Outline Three Certain Positioning Directions For Hong Kong Stocks

Since The Start Of The Year, Hong Kong Equities Have Delivered Strong Performance, With The Hang Seng Index And Hang Seng Tech Marking Their Highest Levels In 21 Years In Early October. From Mid‑October, However, The Market Entered A Correction Phase, With Losses Widening Over The Past Week As The Hang Seng Index Fell Up To 5.1% And The Hang Seng Tech Declined As Much As 8.1%.

Year To Date, The Hang Seng Index Recorded A Maximum Gain Of 47%, While The Hang Seng Tech Index Rose As Much As 61%. From The October Peak, The Hang Seng Index And Hang Seng Tech Have Since Retreated By 8% And 20% Respectively. Investors Are Focused On The Potential Duration And Magnitude Of The Pullback, And Views On The Subsequent Trajectory Differ.

Guotai Haitong Securities (18.710, -0.16, -0.85%) Noted That The Adjustment Since October Was Largely Driven By The Substantial Prior Rally, Tightening U.S. Dollar Liquidity, And A Pullback In Expectations For Federal Reserve Rate Cuts. Corrections Within A Bull Market Are Typical: Historically, Minor Pullbacks Linked To Short‑Term Sentiment Average A 7% Decline, While Larger Drawdowns Triggered By Liquidity Tightening Or External Shocks Average 17%.

The Firm Also Emphasized That Dollar Liquidity Represents A Short‑Term Disturbance. With The AI Wave Ongoing, A Bull Market Supported By Incremental Capital Inflows And A Concentration Of High‑Quality Assets In Hong Kong Is Poised To Continue.

Current Conditions Reflect A Broadening Consolidation. In Early October, Both The Hang Seng Index And Hang Seng Tech Set Yearly Highs, With Maximum Gains Of 47% And 61%, Respectively. Since Mid‑October, The Market Has Moved Into A Correction, Narrowing Year‑To‑Date Gains To 27.78% And 23.66%, Indicating A Notable Retreat.

Multiple Drivers Underpin This Pause. On The External Side, Dollar Liquidity Has Remained Tight And The Outlook For Fed Rate Cuts Has Moderated, Marginally Tightening Financial Conditions. Internally, After A Strong Advance, The Market Exhibits A Technical Need For Consolidation. Heightened Global Concerns About An AI Valuation Bubble Have Added Pressure, Contributing To Volatility.

Dollar Liquidity Tightness And Softer Rate‑Cut Expectations Have Weighed On Hong Kong Equities. From Early October To Early November, The U.S. Government Shutdown Halted Spending, Tightening Dollar Liquidity. Although The Shutdown Has Ended, Key Releases Such As Nonfarm Payrolls And Inflation Have Been Delayed. In This Data Vacuum, The Fed Has Adopted Greater Caution, With Market‑Implied Odds Of A 25 Basis Point Cut In December Falling To 40%. A Stronger Dollar Index Has Further Pressured Hong Kong Stocks.

Prior Gains And Emerging Concerns Around AI Have Also Constrained The Tape. Technology, New Consumption, And Innovative Pharma Delivered Eye‑Catching Advances This Year—With The Hang Seng Tech Up 61%, Hang Seng Biotech Up 130%, And The China New Consumption Index Up 46%—Prompting Some Profit‑Taking. At The Same Time, Fewer Near‑Term Catalysts In AI Software And Rising Bubble Anxiety Have Weighed On Sentiment. The Nasdaq Has Pulled Back 8% From Its High, Adding Pressure To Hong Kong Tech.

Corrections Are Normal In Bull Markets. Minor Pullbacks, Typically Following Rapid Climb Phases, Average A Maximum Decline Of Around 7% And Often Last No More Than 30 Trading Days, With An Average Of About 12 Days. Larger Corrections, Commonly Linked To Liquidity Tightening Or External Shocks, Average About 17% And Around 53 Trading Days. For Instance, In 2013, The Federal Reserve’s Initial Taper Signal Led The Hang Seng Index To Fall About 19% Over 93 Trading Days. In April 2025, A U.S. Tariff Shock Far Beyond Expectations Drove The Hang Seng And Hang Seng Tech Down 23% And 31% Respectively Over 23 Trading Days.

Dollar Strength Appears More A Function Of Short‑Term Liquidity, While The Rate‑Cut Cycle Is Not Over. With The U.S. Government Reopened, Previously Bottled‑Up Liquidity Is Beginning To Be Released. In September, The U.S. Unemployment Rate Ticked Up To 4.4%, Indicating Ongoing Labor‑Market Cooling. The Federal Reserve’s Rate‑Cut Cycle Is Likely To Continue Next Year, Which Could Support Hong Kong Equities. Meanwhile, Technology Leaders Domestically And Abroad Continue To Beat Expectations, And The AI Industry Cycle Remains Upward. Since November, Under The Generative AI Tailwind, Q3 2025 Results From Companies Such As NVIDIA And Tencent Holdings Have Sustained Positive Momentum, Reinforcing The Uptrend.

From A Medium‑Term Perspective, Incremental Capital Inflows And The Aggregation Of Scarce, High‑Quality Assets Suggest Hong Kong’s Bull Market Can Persist Once Short‑Term Pressures Abate. Hong Kong Assets Exhibit Scarcity, Particularly In AI Applications That Align With Current Industrial Evolution.

Southbound Flows Are Likely To Continue. Relative To A‑Shares, Hong Kong’s Scarce Assets Have Higher Correlation With Emerging Industry Trends, Enhancing Their Appeal To Southbound Capital. Despite The Ongoing Consolidation, Southbound Funds Have Demonstrated Contrarian Buying, With Inflows Exceeding RMB 1.3 Trillion This Year. Looking Ahead, Support From Public Funds And Insurers Suggests Further Incremental Capacity, Potentially Sustaining The Market’s Advance.

Structurally, AI‑Driven Technology Remains The Primary Line Of Strength. The Overseas Narrative Of “AI Empowerment” Is Gradually Mapping Onto The Domestic Context, And Stabilizing U.S.‑China Relations Are Improving Risk Appetite. The Impact Of “Subsidy Wars” Among Internet Food‑Delivery Platforms On Profit Expectations Is Also Diminishing. Hong Kong Tech Leaders Possess First‑Mover Advantages In The Current AI Wave And Stand To Benefit From The Ongoing Transformation. As The AI Cycle’s Uptrend Becomes More Certain, Tech Leaders Are Positioned To Regain Relative Outperformance In The Fourth Quarter. Additionally, Dividend Plays Benefit From Strengthened Payout Policies And Low Rates, While New Consumption And Innovative Pharma Assets In Hong Kong Are Comparatively Scarce Versus A‑Shares And Merit Attention In The Second Half.