Hong Kong Market Volatility Intensifies As Institutions Advocate Three Strategic Themes
On February 24, Hong Kong’s three principal indices moved lower together under the influence of external developments. China Galaxy Securities attributed the collective adjustment primarily to a combination of geopolitical tensions and tariff uncertainty, and recommended that investors concentrate on three strategic directions given the present backdrop: safe‑haven assets, consumption recovery, and a technology rebound.
China Galaxy examined market conditions across several dimensions. Trading activity remained notable, with the Hong Kong Exchange recording turnover of HKD 165.461 billion on the prior Friday, below the weekly average of HKD 240.643 billion but still indicative of meaningful market participation. Short‑selling activity rose to 14.43% of turnover for the week, up from a daily average of 12.56% the previous week, signaling widening divergence between bullish and bearish sentiment.
Capital flow data for the seven days ending February 18 showed net inflows into Hong Kong‑listed Chinese stocks of USD 321 million from active global funds and USD 697 million from passive funds, both lower than the prior week. Stock Connect trading was suspended during the holiday period.
As of February 20, valuation metrics and risk‑premium signals exhibited structural differentiation. The Hang Seng Index traded at a price‑to‑earnings ratio of 12.09 and a price‑to‑book ratio of 1.23, corresponding to the 79th and 55th percentiles respectively since 2010, which suggests relatively elevated valuation levels. The Hang Seng Tech Index showed a PE of 21.51 and a PB of 2.83, at the 18th and 49th historical percentiles, indicating room for valuation recovery. Using the U.S. 10‑year Treasury yield of 4.08% as a benchmark, the Hang Seng risk premium of 4.19% sits at the 5th percentile since 2010, reflecting reduced relative appeal versus U.S. government bonds; when measured against China’s 10‑year yield of 1.7899%, the implied risk premium of 6.48% is at the 42nd percentile, offering some allocation rationale.
Sector performance showed clear differentiation and highlighted defensive characteristics in certain areas. Daily consumption, utilities, information technology and communication services all trade at PE levels below the 50th percentile since 2010, placing them in historical mid‑to‑low valuation territory. Dividend yields in energy and communication services exceed 5%, while utilities yield above 4%, reflecting stable income attributes. The Hang Seng AH Premium Index closed at 116.40, near the 9th percentile since 2014, indicating a narrowing of the A‑share premium over H‑shares.
China Galaxy summarized the macro picture as a mix of offsetting forces. On the external front, U.S. fourth‑quarter GDP growth of 1.4% undershot expectations and signaled a slowdown, while trade policy uncertainty intensified after the U.S. administration announced new import tariffs of 10%–15% despite a Supreme Court ruling that constrained presidential tariff authority. Domestically, January housing price declines across 70 cities narrowed, suggesting marginal stabilization in the property market, and Spring Festival travel reached an estimated 5.08 billion cross‑regional trips in the first 20 days, a record that points to a gradual recovery in consumption activity.
Against this backdrop, China Galaxy recommended focusing on three investment themes. Safe‑haven exposures such as precious metals and energy may benefit from elevated geopolitical and tariff risks. The consumption recovery theme is supported by relatively low valuations and the potential for policy‑driven demand stimulus, which could prompt valuation re‑rating. Technology remains a medium‑ to long‑term structural theme; following recent corrections, valuation pressure has eased and the sector may have rebound potential amid accelerated iteration in AI technologies.
