China Galaxy Securities: Investing in Three Main Themes in the Hong Kong Stock Market Amid Geopolitical Conflicts and High Oil Prices

China Galaxy Securities released a research report stating that looking ahead, if the US and Iran enter into a quagmire-style long-term conflict, the Hong Kong stock market will undergo a three-stage evolution of "short-term emotional impact -> medium-term fundamental transmission -> long-term structural differentiation." Macroscopically facing a severe combination of "low growth, high interest rates, and sticky inflation," but the valuation advantage, high dividend characteristics, and the support of southbound funds make the Hong Kong stock market relatively resilient among non-US assets. Investment strategies should focus on three main themes: cyclical sectors; undervalued financial and consumer discretionary sectors; and technology sectors that possess autonomous controllable logic (hard technology). The main points of China Galaxy Securities are as follows: Hong Kong stock market performance this week: (1) This week (March 16 to March 20), the three major Hong Kong stock indices all fell, with the Hang Seng Index dropping by 0.74%, the Hang Seng Tech Index falling by 2.12%, and the Hang Seng H-Share Index ETF dropping by 1.12%. (2) Three industries rose this week, while eight industries fell. Among them, industrials rose by 2.54%, finance rose by 1.71%, and energy rose by 0.96%; materials fell by 10.09%, communication services fell by 3.7%, and information technology fell by 3.19%. Looking at secondary industries, electrical equipment, automotive and parts, banks, durable goods, and industrial trade and miscellaneous goods recorded the highest gains, while non-ferrous metals, media, steel, defense industry, and chemicals recorded the biggest losses. Liquidity in the Hong Kong stock market this week: (1) The average daily turnover on the Hong Kong Stock Exchange this week was HK$284.05 billion, a decrease of HK$89.21 billion from the previous week. (2) This week, there was a net outflow of HK$6.329 billion in southbound funds, a decrease of HK$58.769 billion from the previous week. (3) In the past 7 days until March 18, among Chinese stocks listed in Hong Kong, global active foreign funds saw a net outflow of US$128 million, while global passive foreign funds saw a net outflow of US$204 million, representing increases of US$331 million and US$400 million respectively from the previous week's net inflows. Valuation and risk appetite in the Hong Kong stock market: (1) As of March 20, 2026, the Hang Seng Index had a PE ratio of 12.38 times and a PB ratio of 1.27 times, which are at the 81st percentile and 63rd percentile levels, respectively, since 2010. (2) The 10-year US Treasury yield rose by 11 basis points to 4.39% last Friday, with the risk premium of the Hang Seng Index at 3.69%, which is -1.82 times the standard deviation of the 3-year rolling average and at the 2nd percentile since 2010. The 10-year Chinese government bond yield rose by 2 basis points to 1.83% last Friday, with the risk premium of the Hang Seng Index at 6.25%, which is -1.73 times the standard deviation of the 3-year rolling average and at the 37th percentile since 2010. (3) The Hang Seng Shanghai-Hong Kong Stock Connect A-H share premium index fell by 2.36 points to 119.81 last Friday, which is at the 16.60th percentile level since 2014. Investment outlook: Looking ahead, if the US and Iran engage in a quagmire-style long-term conflict, the Hong Kong stock market will undergo a three-stage evolution of "short-term emotional impact -> medium-term fundamental transmission -> long-term structural differentiation." Macroscopically facing a severe combination of "low growth, high interest rates, and sticky inflation," but the valuation advantage, high dividend characteristics, and the support of southbound funds make the Hong Kong stock market relatively resilient among non-US assets. Investment strategies should focus on three main themes: (1) Cyclical sectors. With the global manufacturing industry recovering and AI capital expenditure expanding, the supply-demand pattern of cyclical sectors is undergoing a systematic reshaping. In terms of strategic resources, it is recommended to pay attention to traditional energy sources such as oil, natural gas, and coal, precious metals such as gold, as well as key metals related to defense and hard technology. In addition, chemicals with cost transmission capabilities and agriculture improving in prosperity are also worth focusing on. (2) Undervalued financial and consumer discretionary sectors. The current valuation of the financial sector is at historical lows, providing sufficient safety margins. Once the situation eases, there is great room for flexibility. Consumer discretionary sectors have strong performance growth and profitability, making them core beneficiaries of consumption recovery and the most defensive growth sector in geo-political disturbances. (3) Technology sectors with autonomous controllable logic (hard technology). The core investment theme for Hong Kong's technology in 2026 focuses on AI, with emerging large-scale open source Chinese models, continuously improving reasoning capabilities, accelerated commercialization, and the potential opening of the AI industry from "dialogue interaction" to "autonomous execution" through developments such as OpenClaw. Currently, global funds significantly favor upstream technology hardware, and the trend of hard-to-soft trading of HALO is expected to continue in the first half of the year. It is recommended to focus on hard technology sectors with industry trends and autonomous controllability, especially semiconductor equipment, electronics, and communication, which demonstrate strong resistance to declines in times of external uncertainty. Risk warning: Risks include domestic policy intensity and effectiveness falling short of expectations, overseas interest rate cuts falling short of expectations, and market sentiment instability.