China Securities Co., Ltd.: Hong Kong stock market is undergoing a midterm adjustment rather than coming to an end. Seize the opportunity to go long for the first time this year.

China Securities Co., Ltd. released a research report stating that since February 2026, the Hong Kong stock market has experienced a rapid adjustment, with the Hang Seng Index and the Hang Seng Technology Index both experiencing significant declines in sync, indicating a significant phase of retracement. However, the bull market trend in the Hong Kong stock market has not ended, and this round of retracement is considered a typical mid-term adjustment in a bull market rather than a trend reversal. It is currently a good opportunity to actively seize the first long position window of the year. From a long-term trend perspective, this adjustment only impacts market valuation and short-term risk appetite, without undermining the core theme of Hong Kong stock profit recovery. In terms of overseas liquidity, recent statements from TACO have indicated marginal improvement, with signs of easing external liquidity and market sentiment pressure. For institutional investors, the conditions for left-hand layout have been met. If external shocks do not escalate further in the future, there is a high probability that the Hong Kong stock market will move out of the adjustment range and return to a range of oscillation and upward movement. The focus of the current market trend will shift from valuation-driven to profit-driven, with a focus on high-quality structural opportunities. The main points of China Securities Co., Ltd. are as follows: In recent years, there has been a separation of A-share and H-share markets, reflecting the current "super cycle" of technology, supply chain restructuring, and fiscal cycles resonating together. This super cycle reflects the global shift from old to new order. The A-share and H-share markets include different types of companies in the AI hardware and software industries. The trading focus of the AI industry chain varies between A-shares and H-shares, with divergence particularly evident in the technology sector. AH shares contain different components of China's new and old economy. Under the supply chain restructuring cycle, Chinese manufacturing is accelerating its rise, while traditional welfare state manufacturing is hollowing out. China is leveraging this trend to drive the transition from old to new economy. The process of transition in the Chinese economy has also deepened the divergence between A-shares and H-shares. The liquidity composition of the AH market is different, with monetary liquidity heavily influenced by the fiscal cycle. Changes in the US dollar index and the RMB exchange rate have led to a divergence in AH market liquidity. After moving from cooperation to divergence, AH markets will eventually revert to cooperation. As the world emerges from a period of turmoil, China's assets will have a greater impact globally. In our previous research, we reviewed the linkage between A-share and H-share bull markets since 2000 and found that the correlation between the two is mostly very strong. Instances where the two deviate from their usual rhythm are mainly due to special periods and the divergence of Sino-US monetary policies. Since 2025, the rhythms of the H-share and A-share markets have started to diverge again, with different relative performances in the first and second halves of the year. I. Since 2025, the Hong Kong stock market has moved in a rhythm different from that of A-shares The divergence in AH shares is not only evident in major broad market indexes but also in technology indexes. In particular, within the technology sector, the divergence between the Hang Seng Technology Index and the ChiNext Index, as well as the Science and Technology Innovation 50 Index, is more pronounced. The divergence in the rhythms of AH shares in 2025 is very clear, and the rotation is unusually fast. Initially, Hong Kong stocks led the way; in the second and third quarters, both AH shares rose, but A-shares were more dominant; after the fourth quarter, the divergence in AH shares became more pronounced, with A-shares demonstrating more resilience. In terms of the AH premium rate, Hong Kong stocks outperformed in the first half of 2025, while A-shares had a relatively stronger performance in the second half. In the first half of 2025, the premium rate for Hong Kong stocks decreased rapidly from around 140 to a low level of around 125. In the second half of 2025, the premium rate stabilized at a low level with narrow fluctuations, suggesting that the investment logic based solely on discount arbitrage was less attractive. It is worth noting that some industry leaders, such as Contemporary Amperex Technology and China Merchants Bank, even showed H-share premiums, reflecting the improved pricing ability of Hong Kong stocks for high-quality assets. II. The deviation between Hong Kong stocks and A-shares is primarily due to differences in the numerator of AH shares, i.e., the types of listed companies. Despite being part of the same AI industry chain, A-share and Hong Kong-listed companies are positioned differently in the AI industry chain. The ChiNext Index and the Science and Technology Innovation 50 Index in A-shares are dominated by AI hardware companies, covering leading companies in sectors such as semiconductors, electronic components, communication equipment, and new energy equipment in the hard technology field. In contrast, the Hang Seng Technology Index is dominated by AI application companies, with significant weight on internet companies like Tencent, Alibaba, Meituan, and JD.com. Since the release of DeepSeek in February 2025, there has been a reevaluation of China's AI application industry globally. During this period, AI applications surged, and the Hang Seng Technology Index significantly outperformed the Science and Technology Innovation 50 Index. At the beginning of 2026, the emergence of AI Agents disrupted the traditional business models of software companies, becoming another important driver of divergence in technology stocks in AH markets. Although leading companies in the Hong Kong market actively expanded their presence in the AI Agent field, the transformation pressure on their traditional businesses still raised market concerns. In contrast, AI hardware companies in the A-share market were less affected by AI Agents, showing relatively greater resilience. While mirroring the Chinese economy, listed companies in A-shares and Hong Kong stocks have significant differences in their response to new and old growth drivers. The Hang Seng Index has a higher weight of traditional industries such as finance, real estate, energy, and raw materials, which are highly related to domestic macroeconomic cycles. While the Hang Seng Technology Index has a higher weight of internet companies in the new economy category, the performance of these companies is closely linked to the domestic consumer market's vitality. The ChiNext Index and the Science and Technology Innovation 50 Index in the A-share market have a significantly higher proportion of new economy sectors, including strategic emerging industries such as new energy, semiconductors, biomedicine, and high-end equipment. These industries are also affected by macroeconomic cycles, but their growth is more influenced by industry policies, technological advancements, and domestic substitution processes, giving them strong inherent growth potential. III. The deviation between Hong Kong stocks and A-shares is primarily due to differences in the denominator of AH shares, i.e., the pace of liquidity between China and the US is not always the same. As the core channel for foreign investment in Chinese assets, the operation of the Hong Kong stock market is closely linked to the global US dollar credit cycle. As an offshore financial market, foreign capital has been an important source of funds for the Hong Kong stock market. Since 2021, due to factors such as the pandemic, supply chain disruptions, tariffs, fluctuations in the US dollar index, and geopolitical tensions, the foreign liquidity in the Hong Kong stock market has experienced significant fluctuations. Since 2021, foreign investment in Hong Kong stocks has been on a downward trend, with the proportion of foreign allocation dropping from over 40% to around 25%. After 2025, as the US dollar weakened and the resilience of the Chinese economy became apparent, the trend of continuous outflow of foreign capital reversed, and Middle Eastern funds began to allocate to Hong Kong stocks. At the beginning of 2026, international funds once again exited the Hong Kong stock market due to geopolitical factors. It is worth noting that in the long term, the global attractiveness of RMB assets is expected to increase, with Hong Kong stocks being the first choice for foreign investment allocation in China, attracting a return of some foreign capital. Recent signs indicate that more Middle Eastern funds are entering the Hong Kong stock market. Domestic liquidity in A-shares is more influenced by domestic factors, and the divergence in liquidity between China and the US has historically been a key reason for the rhythmical differences in AH shares, explaining the divergence in 2025. In the first half of 2025, H-shares performed significantly better than A-shares, coinciding with a sharp decline in the US dollar index (from a high of 110 to near 96). After the second half of 2025, Hong Kong stocks showed weakness, demonstrating a clear underperformance compared to A-shares. During this period, the US dollar index strengthened, while domestic liquidity remained ample. Contrary to the restrictive stance of the Federal Reserve in the second half of 2025, domestic macro liquidity remained relatively abundant. Throughout 2025, the required reserve ratio was reduced by 50bp, policy interest rates were lowered, 7-day reverse repurchase agreements decreased to 1.5%, 1-year medium-term lending facilities dropped to 2.2%, and 5-year loan prime rates fell to 3.4%, all at historically low levels. In addition, in 2024, the central bank introduced swap facilities and stock repurchase agreements, providing targeted liquidity support to the equity market. IV. The deviation between Hong Kong stocks and A-shares is also influenced by institutional factors, specifically financial regulatory policies and disruptions in Hong Kong stock listings Financial policies in recent years have affected the allocation of southbound funds to Hong Kong stocks. Southbound funds have been a significant source of incremental funds for Hong Kong stocks in recent years, with mutual funds and insurance funds being major participants in southbound funds. Under new regulations for mutual funds, the willingness of active mutual funds to increase their holdings of popular tracks in Hong Kong stocks has declined. Insurance funds continue to increase their allocations to the Hong Kong market, with a focus on sectors such as banks and utilities that offer high dividend yields. The IPO pace and lock-up period of new listings in Hong Kong have a significant impact on the micro liquidity environment. Recently, new regulations in Hong Kong have further encouraged companies to list in Hong Kong, with short-term disruptions to IPOs potentially continuing to impact liquidity in the Hong Kong stock market. After a company lists a new stock in Hong Kong, it typically faces a lock-up period of 6-12 months, which means that in 2026, Hong Kong could face a large-scale unlocking of shares. This could not only increase market supply pressure but also impact the valuation levels of related stocks. The matching of the unlocking schedule with market capacity is something to watch out for. V. The root of the divergence in AH share rhythms and the future trend of Hong Kong stocks The main differences between Hong Kong stocks and A-shares are due to differences in listed companies and liquidity in the market. Therefore, explanations for the divergence in the rhythmic movement of AH shares can generally be found by examining the numerator and denominator. We emphasize that the world is currently in a "super grand cycle," with technology, supply chain restructuring, and fiscal cycles resonating together. This resonance reflects the global shift from old to new order. The current technology cycle is of utmost importance, as it influences the performance of different stock markets. A-shares focus on AI hardware companies, while Hong Kong stocks emphasize AI application companies. The trading focus of the AI industry chain varies at different times, leading to divergence in AH shares, especially in the technology sector. The supply chain restructuring cycle corresponds to the accelerated rise of China's manufacturing industry, while traditional welfare states see a hollowing out of manufacturing. During this process, China is leveraging the global supply chain restructuring to drive the transition from old to new economy. The proportion of new economy sectors in the ChiNext Index and the Science and Technology Innovation 50 Index in A-shares is significantly higher, while the Hang Seng Index's traditional industry weight is relatively high. Even though Hang Seng Technology includes a higher weight of internet companies, it still has a high consumer attribute. Therefore, as China completes its transition between old and new economies, the divergence in AH shares deepens. The fiscal cycle mainly refers to years of loose fiscal policies in Europe, Japan, and the US, with fiscal imbalances becoming evident. During this process, due to fiscal pressures, monetary policies in Europe, Japan, and the US have been slow to tighten. The fiscal pressures on Western economies due to technology have been shown at different times, eventually manifesting in fluctuations in the US dollar index. The RMB exchange rate has shown more independence within this US dollar cycle, leading to a divergence in AH share liquidity. VI. Future trends of Hong Kong stocks after the divergence In the short term, the strong US dollar environment coupled with controversies in the AI application sector, resulting in some internet companies being affected by the "food delivery war" and lowering their performance, have led to continued adjustments in Hong Kong stocks. Since March, against the backdrop of escalating tensions in the Middle East, global funds have been entering a "risk-averse mode," with a decline in global market risk appetite impacting equity markets significantly. Coupled with concerns about secondary inflation due to rising energy prices, Hong Kong stocks, as offshore risky assets, have been under direct pressure. In the medium to long term, since the second half of 2025, the weighted RMB exchange rate index has continued to strengthen, reflecting a trend of RMB appreciation. In the context of diverging growth momentum among major global economies, the resilience of China's economy has gradually become more apparent, transitioning from a "valuation valley" to a "growth highland," which is expected to increase the attractiveness of global capital to RMB assets. In addition, the recent influx of high-quality A-share companies with new production capabilities and leading positions in specific industries listing in Hong Kong has fundamentally optimized the composition of the Hong Kong stock asset pool. The listing of high-quality assets is expected to attract increased global capital allocation to Hong Kong stocks. Risk Warning: There is still uncertainty regarding the sustainability of consumer recovery. While consumer spending has begun to pick up this year, the degree of recovery is limited. Whether consumption will continue to be weak and constrain the momentum of economic recovery remains to be closely monitored. There is uncertainty regarding whether the real estate industry will continue to improve. This current downward cycle in the real estate sector has lasted for a long time, and while there is a brief trend of recovery, many indicators are still showing negative growth. Whether this recovery trend can be maintained in the future needs to be observed. There is a risk of incomplete data availability, model failure leading to calculation errors, and data statistical errors due to limitations in data sources. Unexpected tightening of monetary policies in Europe and America could have a negative impact on global economic growth and asset prices. Geopolitical conflicts still pose uncertainty, which could disrupt global economic growth prospects and market risk appetite.