Industrial: Hong Kong Stock Market may have beta trading opportunities in the second half of the year, focusing on five investment themes.

Industrial released a research report stating that in order for the Hong Kong stock market to form a truly sustainable index trend, it still needs to wait for more conditions to resonate. In the past period, the adjustment of the Hong Kong stock market, especially the Hang Seng Tech Index, mainly came from downward revisions in profit expectations. In the structure of the Hong Kong stock market index, sectors such as Internet, consumption, finance, and automobile have relatively high weights, and their profit performance is closely related to the Chinese credit cycle, domestic demand recovery, and consumer confidence. In the second half of the year, there may be an opportunity for a beta market trend at the index level. As the stability of the Chinese economy is further recognized by investors in the second half of the year, and with the expectation of a rate cut by the Federal Reserve after mid-year, it is expected to catalyze the Hong Kong stock market index to usher in a new round of upward momentum. The main points of Industrial are as follows: [1] Reconstruction of Global Order: "Disorder" is the new normal, and the certainty advantage of Chinese assets is becoming more prominent. The global order is currently undergoing a profound restructuring, with significant increases in uncertainty in international political, economic, and security situations. "Disorder" is the new normal that global assets and investment decisions must face for a considerable period in the future. Even if some geopolitical conflicts appear to ease in the short term, the world is unlikely to return to the relatively stable, low-friction "security world" of the past. 1) From the perspective of changes in global economic power, the trend of multipolarity is accelerating, with the shift in the center of manufacturing industry indicating a change in the global industrial chain and resource allocation pattern. 2) In terms of security environment, global military spending is increasing, and the number of regional and inter-state conflicts is at a high level. The division of labor system under the traditional globalized order, which prioritizes efficiency, is gradually giving way to a new system that prioritizes security. In the new normal of "disorder," the security of traditional "safe assets" is decreasing, and global funds need to seek new sources of "security" and certainty. 1) The unconditional safe-haven properties of traditional safe assets such as US Treasuries and the US dollar are weakening; in events such as tariff and war shocks, US Treasuries no longer exhibit stable safe-haven properties and may even trend upwards. 2) Global funds' reliance on a single safe asset is declining, and the demand for diversified asset allocation is increasing. Since 2018, the proportion of US dollars in global central bank reserves has been steadily declining. In the midst of the global disorder, Chinese assets have shown strong resilience. 1) The diversification of energy structure, especially the increasing share of renewable energy consumption, enhances China's ability to withstand shocks. 2) Every global supply shock since 2018 has amplified the leading position of China's manufacturing industry globally. During times of pressure on the external supply chain due to geopolitical conflicts, fluctuating energy prices, or disruptions in logistics, the production stability, cost advantages, and industrial support capabilities of the Chinese manufacturing industry become more prominent. 3) China's current inflation level is relatively low, and there is still considerable room for macro policy adjustments in the future. 4) Although geopolitical conflicts may bring short-term market disturbances, they may also prompt global funds to reevaluate the relative value of Chinese assets. [2] Overseas Liquidity Environment: Still loose, with the expectation of a Federal Reserve rate cut reversal in the second half of the year, funds continue to flow from the US to "non-US" markets. The overseas liquidity environment has not fundamentally reversed due to geopolitical conflicts and oil price shocks. Looking back at the five periods since the 1970s when wars drove up oil prices, the Federal Reserve did not necessarily raise interest rates. The policy response ultimately depends on a comprehensive assessment of the economic cycle position, employment, output gaps, and whether inflation expectations are out of control. 2) Unlike the Russia-Ukraine conflict in 2022, before this round of shocks, U.S. inflation pressure was relatively manageable, and the sensitivity of the U.S. economy and inflation to oil prices has decreased. In the second half of the year, with constraints from high debt levels, a K-shaped economy, and disruptions from midterm elections, the expectation for a Federal Reserve rate cut is expected to reverse. 1) New job creation in the U.S. labor market has been weakening, especially evident in the declining wage growth of low-income groups. High interest rates first squeeze low-income groups, and the mortgage delinquency rate for low-income families has risen to the highest level in the past decade. 2) Military spending further burdens the U.S. federal government's debt, and the longer interest rates remain high, the heavier the fiscal interest burden, limiting the long-term sustainability of high-interest rates on U.S. employment, consumption, credit, and fiscal pressures. 3) As the midterm elections approach in the second half of the year, political factors may significantly increase disturbance in expectations for monetary policy, and the market's game on the window for rate cuts will also intensify. The global fund allocation logic continues to shift towards a more diversified non-US allocation framework. 1) The uncertainty of U.S. policies is increasing, weakening the U.S. dollar as a global safe asset and reserve currency. The U.S.-Iran conflict may further undermine the security foundation of the petrodollar system. 2) Since 2025, global funds have begun to rebalance regional allocations. The flow of funds to non-US markets is clearly accelerating, narrowing the gap between funds flowing to the U.S. market, and the proportion of global funds allocated to the U.S. market is marginally decreasing. [3] Fundamental Outlook: Under the global disorder, positive changes in the fundamentals of China are becoming apparent. First, the recovery of nominal prices and signs of marginal stabilization in the real estate market are helpful in breaking the linear expectations of overseas investors for China falling into deflation and balance sheet recession. On the one hand, the domestic price environment is undergoing positive changes. The effect of the "anti-indulgence" policy continues to show results, the competition landscape in some industries is gradually optimizing, coupled with the recovery of international metal prices and oil prices, collectively driving the marginal restoration of industrial product prices, opening up room for improvement in corporate profits and revaluation of Chinese assets. On the other hand, the real estate market is also showing signs of marginal stabilization. Referring to the experience of the Hong Kong market in China, when rental yields are close to or exceed mortgage rates, and core cities still maintain net population inflows, the real estate market is often more likely to stabilize first. Currently, the rental yield of first-tier cities in mainland China has exceeded the 10-year national bond rate, and the transaction volume and prices of second-hand houses show that the downward pressure on the real estate market is easing marginally. Second, the further rise in the global cost center will further highlight the advantages of Chinese manufacturing. The current tension in the Middle East, recurring geopolitical conflicts, and the rising demand for global supply chain security are pushing up global production, transportation, and energy costs. The advantage of China's manufacturing industry with complete industrial chain support capabilities, strong manufacturing resilience, and significant price advantages is expected to be further highlighted. Third, with the reconstruction of the international order, globalization is shifting from "efficiency-first" to "security-first," and self-reliance in technology remains an important direction. On the one hand, the trend of the AI industry is still evolving, and since 2026, there has been a surge in demand for large-scale model inference. On the other hand, the Chinese AI chip market is experiencing rapid growth, with domestic manufacturers' market share significantly increasing. The deep integration of DeepSeek and Huawei's Ascend indicates that the synergy between domestic large models and domestic computing power ecosystems is strengthening, potentially accelerating the process of domestic substitution. [4] Mid-term Outlook for the Hong Kong Stock Market: Strategically not pessimistic, tactically not aggressive, finding opportunities within chaos, and winning through structure. The liquidity in the Hong Kong stock market is still abundant and is expected to continue to catalyze structural opportunities. 1) The turnover of the Hang Seng Index is maintained at relatively high levels over the years. 2) The momentum of foreign capital reallocation to Chinese assets is expected to strengthen, tactically fluctuating along with economic and geopolitical conflict rhythms. 3) IPOs are a sweet trouble; the Hong Kong stock market still remains a market where dividends and buybacks exceed IPOs and additional financing, with the supply of quality assets brought by IPOs becoming an important attraction for foreign investors. For the Hong Kong stock market to form a truly sustainable index trend, it still needs to wait for more conditions to resonate. 1) In the past period, the adjustment of the Hong Kong stock market, especially the Hang Seng Tech Index, mainly came from downward revisions in profit expectations. In the structure of the Hong Kong stock market index, sectors such as Internet, consumption, finance, and automobile have relatively high weights, and their profit performance is closely related to the Chinese credit cycle, domestic demand recovery, and consumer confidence. 2) In the second half of the year, there may be an opportunity for a beta market trend at the index level. As the stability of the Chinese economy is further recognized by investors in the second half of the year, and with the expectation of a rate cut by the Federal Reserve after mid-year, it is expected to catalyze the Hong Kong stock market index to usher in a new round of upward momentum. Investment opportunities: Winning through structure. Investment Main Line 1: Reconstruction of the international order, reassessment of strategic resources. Even if the intensity of future wars decreases, the global geopolitical narrative has fundamentally changed, and the importance of energy security and strategic resources is being revalued, gold, non-ferrous metals, energy, and new energy are expected to continue to receive value revaluation. Investment Main Line 2: The global competitive advantage of China's advanced manufacturing will continue to be realized. It is recommended to focus on leading companies in advanced manufacturing that have the logic to increase their international market share, such as the chemical industry, machinery, power equipment, automobiles, and auto parts industries. Investment Main Line 3: Dividend assets, high probability income assets in the low-interest rate era. Investment Main Line 4: The continuation of the technology AI trend, accelerating the process of domestic substitution. Domestic computing power is expected to benefit from expanding demand and accelerating domestic substitution. The valuation of NETDRAGON in the AI industry remains near historical lows and awaits stabilization and recovery of profit expectations; newly listed technology stocks need to address the local supply pressure brought by the unlocking of restricted shares. Investment Main Line 5: Opportunities for the over-expected recovery of the domestic demand chain, such as leading real estate companies, property management, social services, restaurant chains, and other consumer service areas where fundamentals are the first to stabilize.