CITIC SEC: Hong Kong stocks already have the foundation to resume an upward trend, with key focus on dividends, AI hardware, and AI applications.

CITIC SEC released a research report stating that the overseas rate hike cycle combined with the restart of AI momentum trades continues to weigh on Hong Kong stock liquidity. Although derivatives trading has already fairly fully priced in this round of the Federal Reserve's rate hike cycle, and has incorporated expectations that the Bank of Japan and the European Central Bank will also continue raising rates, against the backdrop of further rising concerns over sovereign credit in overseas developed countries, overseas risk-free rates may still continue to rise. The fundamental expectations for Hong Kong stocks have bottomed out, and the profit growth of major indices has begun to be revised upward. With the stabilization and rebound of fundamental expectations for broad-based indices and weighted industries, Hong Kong stocks already have the foundation to resume an upward trend. After two consecutive months of correction, the valuation attractiveness of Hong Kong stocks is gradually emerging. Based on tracking and assessment of the earnings outlook and capital flows in the Hong Kong stock market, it is recommended to focus on dividends, AI hardware and AI applications, biotechnology, and shipping, among other directions. The overseas rate hike cycle combined with the restart of AI momentum trades continues to weigh on Hong Kong stock liquidity. Although derivatives trading has already fairly fully priced in this round of the Federal Reserve's rate hike cycle (with a probability of three more hikes through June next year), and has incorporated expectations that the Bank of Japan and the European Central Bank will also continue raising rates, against the backdrop of further rising concerns over sovereign credit in overseas developed countries, overseas risk-free rates may still continue to rise. The composite discount rate for Hong Kong stocks has risen from 3.1% at the end of February 2026 to 3.9% in early October, continuously weighing on Hong Kong stock valuations. In addition, U.S. hyperscalers' capital expenditure is still maintaining a relatively high growth level, and it cannot be ruled out that future guidance may continue to be raised during the third-quarter earnings season starting in October. Against this backdrop, since mid-September there have been signs of a restart in overseas AI momentum trades, similar to the situation in early October 2025 when earnings expectations in markets such as South Korea and China's Taiwan began to be revised upward and gradually siphoned capital away from Hong Kong stocks. Therefore, looking ahead to October 2026, these two major overseas factors (rising risk-free rates and the restart of overseas AI trades) may still exert some pressure on Hong Kong stock liquidity. If the RMB exchange rate gradually stabilizes going forward and drives accelerated inflows of southbound capital, the liquidity pressure on Hong Kong stocks is expected to gradually improve. However, the fundamental expectations for Hong Kong stocks have bottomed out, and the profit growth of major indices has begun to be revised upward. But the biggest difference from October 2025, when foreign capital began to flow out, is that at that time the 2025 earnings expectations for Hong Kong stocks were continuously revised downward, whereas since September the earnings expectations for major Hong Kong stock indices have begun to stabilize and show signs of upward revision. Specifically, the 2026/27 earnings growth expectations for the Hang Seng Composite Index were revised upward by 0.9/0.6 ppts to 11.0%/9.8%, respectively; the 2026 earnings growth expectations for the Hang Seng Index and the China Enterprises Index were also revised upward by 0.6/0.9 ppts to 7.9%/7.3%, respectively, indicating that the trend of a bottoming and rebound in overall earnings expectations for Hong Kong stocks has gradually taken shape. At the first-level industry level, earnings expectations for real estate and construction, upstream resource products, and the weighted technology and financial industries were all revised upward during the same period. However, the 2026 earnings and revenue growth expectations for the Hong Kong stock major consumer sector were revised downward, indicating that the fundamentals of domestic demand-related industries have still not improved, and it is still necessary to wait for the third-quarter earnings season to observe whether an inflection point emerges. Overall, however, with the stabilization and rebound of fundamental expectations for broad-based indices and weighted industries, Hong Kong stocks already have the foundation to resume an upward trend. After two consecutive months of correction, the valuation attractiveness of Hong Kong stocks is gradually emerging. Since the correction from the high in early August 2026, Hong Kong stock valuations have noticeably narrowed. The current forward PE of the Hang Seng Index has narrowed to 10.0x, at the 29th percentile historically, and the ERP has also reached 6.1%; although the 2026 earnings expectations for the Hang Seng Tech Index have not been revised upward recently, the current forward PE of the index has fallen back to 14.6x, at only the 7th percentile historically, close to the valuation low seen in early April 2025 when the "reciprocal tariffs" broke out. At the same time, the valuation ratio of the Hang Seng Tech Index relative to the Nasdaq 100 has also narrowed again to the 25th percentile historically. Overall, against the backdrop of Hong Kong stocks continuing to correct for two months and earnings expectations beginning to be revised upward, the attractiveness of allocation is beginning to emerge. If a series of new domestic property policies can drive the return of positive wealth effects and domestic demand begins to recover, we are bullish on a "earnings + valuation" double-click market for Hong Kong stocks in the fourth quarter of this year. In the short term, however, given that the fundamental inflection point in the major consumer sector still needs to be verified, and against the backdrop of elevated overseas risk-free rates and the reappearance of AI momentum trades, investors are advised to remain patient with Hong Kong stocks, and the short-term dividend strategy is expected to continue to relatively outperform. If in October the Hong Kong stock CKH HOLDINGS consumer sector continues to adjust, and the third-quarter earnings inflection point is confirmed, a better allocation opportunity may emerge before the MSCI quarterly rebalancing point near the end of November.