When Will Hong Kong Stocks Reach Their Low Point?

In the report What Conditions Are Needed For Hong Kong Stocks To Reverse? (20260326), we argued that excessive pessimism toward Hong Kong equities was unwarranted and that a rebound could follow. Nevertheless, renewed geopolitical developments over the weekend prompted another decline in the market today. To assess the path ahead, we examine sentiment, valuation, earnings, geopolitics, liquidity and historical patterns to project possible trajectories for Hong Kong stocks.

Looking forward, the short‑term rhythm of geopolitical escalation is inherently uncertain, and Hong Kong equities are likely to exhibit correlated volatility with external shocks. At the same time, much of the market’s pessimism appears to be priced in, downward earnings revision pressure has eased, and mid‑term expectations of U.S.–Iran negotiations have emerged; therefore, we do not adopt an outright negative stance. Given the current environment, both long and short positions may offer limited risk‑reward advantages, making a cautious “observe and wait” approach prudent. Should U.S. military action exceed market expectations and trigger panic selling, that scenario could present a genuine tactical opportunity for oversold rebounds.

Global risk assets are expected to remain highly volatile in the near term, which will likely constrain Hong Kong equities as overseas risk appetite recedes. Prior analysis in U.S.–Iran Tracking 4: Can We Begin To Expect De‑Escalation? (20260325) noted that the political incentives for direct concession remain weak, and concerns about ground operations persist. Reports indicating U.S. Department of Defense preparations for extended ground activity in Iran suggest that global markets may continue to face elevated volatility, weighing on Hong Kong performance.

Market sentiment for Hong Kong equities remains in a distressed zone. As of March 27, our Hong Kong sentiment index declined 13.3% week‑on‑week to 21.8%, the lowest reading in 24 years, which historically points to the potential for a rebound. Year‑to‑date through March 27, timing strategies based on the Hang Seng and Hang Seng Tech indices have produced excess returns of 5.7% and 12.0% respectively.

Valuations in Hong Kong are comparatively attractive versus other major markets, which may reduce vulnerability to liquidity shocks. As of March 27, 2026, the Hang Seng Index’s forward 12‑month price‑to‑earnings ratio stood at 11.1x, below U.S. equities at 19.7x, Japan at 17.2x, Europe at 14.4x and non‑China emerging markets at 12.3x, implying relatively lower sensitivity to tightening liquidity.

With the earnings season nearing completion, the drag from profit revisions has diminished and the market may be positioned to move forward with lighter headwinds. By March 27, companies that had released 2025 annual reports accounted for nearly 70% of listed issuers and 88.5% of market capitalization, and most core leaders have already disclosed results, limiting the scope for further negative surprises.

Although short‑term volatility in Iran could persist, we assess the medium‑term trajectory as more likely to favor de‑escalation than sustained escalation. International and domestic pressures on U.S. policymakers, together with Iran’s consolidated posture, reduce the political and military incentives for indefinite escalation. Rising oil‑price pressures and battlefield setbacks increase the probability that negotiations will be pursued in the medium term.

The market may also be overpricing the risk of liquidity tightening. Influenced by the 2022 “learning effect,” market expectations for Federal Reserve policy often overshoot. The U.S. financial conditions index has retreated toward zero since March and sits near the 12.7th percentile since 2023. Given weaker household demand relative to 2021–2022, the transmission of higher oil prices to U.S. inflation may be smaller and slower than currently feared, suggesting that stagflation is not necessarily the baseline outcome and that overly pessimistic policy expectations could be revised.

Assuming the global economy avoids recession, the incremental downside for U.S. equities from the current geopolitical shock appears limited relative to historical episodes. Our review of 25 geopolitical conflicts since 1939 shows that, within 60 trading days of outbreak, the S&P 500’s median and mean maximum declines were 5.1% and 7.1% respectively, with bottoms typically forming after roughly 20 trading days. U.S. equities have already fallen 7.4% in March following the recent U.S.–Israel–Iran hostilities. Post‑World War II samples indicate that only when conflicts coincide with U.S. recessions do S&P 500 drawdowns exceed double digits, as in 1973, 1990 and 2001. As of March 27, 2026, only 25.37% of MSCI Global Index constituents were trading above their 50‑day moving average, a level consistent with prior market troughs.

Key indicators to monitor for a sustainable trend reversal include clearer regulatory signals that reduce excessive competition, the April release of new HunYuan and DeepSeek large models and their impact on confidence in Chinese technology, whether March–April economic activity data surprise to the upside, the timing of net inflows into Hong Kong ETFs, and progress in U.S.–Iran negotiations.