Shenwan Hongyuan Group's 2027 Hong Kong stock strategy: Liquidity environment expected to be better than this year, fundamentals and valuations poised for resonance recovery.

Shenwan Hongyuan Group released a research report stating that in 2026, Hong Kong stocks saw "value clearly outperform growth," primarily due to a double hit to both earnings and valuations in the technology sector. Looking ahead to 2027, the direction of the global trading main theme may change, and Hong Kong stocks have room for mean reversion: pressure from the liquidity "drainage side" (refinancing, share reductions) is expected to ease, the low base effect formed by downward earnings revisions in technology growth stocks will be concentrated in the first half of 2027, and over the past decade Hong Kong stocks have never experienced two consecutive years of valuation compression. Structurally, upward earnings revision directions are concentrated in financials, resource commodities, and hardware industries, among which the stock prices of raw materials, non-bank financials, and semiconductor sectors have not yet caught up with the pace of upward earnings revisions; the current Hang Seng Tech ERP once probed to a level close to April 2025, market sentiment is already quite pessimistic, and if existing short positions loosen, this could become the first round of funding source for a market reversal. Based on ERP model calculations, under the neutral scenario the Hang Seng Index's potential return in 2027 is approximately 14.62%; under the optimistic scenario the return could reach 33.24%; under the pessimistic scenario it is -7.28%. Shenwan Hongyuan Group's main views are as follows: Against the backdrop of the ebbing of the US dollar, the positioning of Hong Kong's financial market is expected to undergo systematic reconstruction. Intercepted by the "three gates" of long- and medium-term damage to US dollar credit, tariffs driving a "wedge" into the global dollar circulation, and the systematic contraction of Asia-Pacific PE long-term capital, the US dollar liquidity that Hong Kong's financial market has long relied upon is in a trend of ebbing, and the currency structure of participants in Hong Kong's financial market is bound to undergo major changes. The hedging force lies in the deep participation of the renminbi: the renminbi's share of international payments has now reached 6-7%, but its share in reserves and bond denomination is only 1-2%; the bottleneck of "being able to spend it but not invest it" is being broken through multiple channels including dim sum bonds, RMB trading counters, government bond futures derivatives, and mutual market access, with offshore and onshore renminbi jointly reshaping the Hong Kong market. In addition, the Hong Kong stock market can also play an important role under mainland Chinese capital's long-term pursuit of high-yield assets: on the one hand, the cost-effectiveness of Hong Kong dividend assets remains outstanding, the long-term allocation of onshore renminbi has not ended, and there is currently room for convergence in the price spread of small-cap dividend stocks; on the other hand, the asset pool of the Hong Kong stock market is becoming increasingly rich against the backdrop of various listing system reforms and efforts to attract foreign companies to list and be included in Stock Connect. As a market that can simultaneously reach international and mainland capital, Hong Kong stocks' dual hub value of "bringing in and going out" is expected to continue to strengthen, among which the issuance of cross-market ETFs and their inclusion in Stock Connect are the latest manifestation of this value. The overall liquidity environment of the Hong Kong stock market in 2027 is expected to be better than this year. On the "drainage side" of funding demand, the "drainage effect" of IPOs is more a short-term disturbance from subscription funds; the important driver behind turnover in 2025-2026 nearly doubling compared with 2021 is precisely the turnover contribution of newly listed companiesnew shares and old shares are not a zero-sum game. Historically, an increase in lock-up release scale alone has almost no systematic impact on broad-based indices, with pressure mainly manifested at the individual stock level. The real suppressing factor is refinancing and share reductionsthis year refinancing once approached a historical high, the combination of "large-scale refinancing + small-proportion equity dilution" puts the greatest pressure on the market, and the rise in substantive reductions by major shareholders is an important factor behind the tightening of Hong Kong stocks' liquidity environment this year. On the "supply side" of funding supply, although the overall scale of market buybacks this year has not returned to historical highs, the number of buyback companies this year has hit a historical high, with breadth wider than in 2024, and historically the timing significance of the number of buyback companies indicator is significantly better than that of buyback amount. Overall, since July 2026 the "buyback-financing-share reduction" gap has clearly converged, the scale of shareholder returns during the year still slightly leads market financing, and the overall funding supply-demand structure remains better than the two cycles of 2017-2018 and 2020-2021. As the IPO break issue rate has risen recently, it is expected that the overall financing scale of Hong Kong stocks in 2027 may decline somewhat, and coupled with lock-up releases peaking in January 2027 and then falling back, pressure on the drainage side is expected to ease. In terms of incremental capital: southbound capital saw net inflows of around HK$400 billion during the year, and the annual turnover share declined for the first time since launch. Although public funds' Hong Kong stock allocation ratio passively rebounded to 10.8% in the third quarter, it remains at a low level, and institutional investors participating in Hong Kong technology growth sectors through ETFs also clearly reduced positions in 2026. The recent return of overseas capital is mainly short-term tactical capital such as ETFs, while medium- and long-term capital has not yet turned to going long. It is worth noting that the current share of short-selling trading and the amount of outstanding short positions are both at historical highs; if a reversal occurs subsequently, short-covering trades are expected to become an important source of funding pushing the market higher. Fundamentals and valuations are expected to recover in resonance. On the earnings side, this year Hang Seng Index EPS has been relatively stable while Hang Seng Tech EPS has continued to be sharply revised downearlier mainly because involution-style competition eroded profits, and now because rising Capex under the AI hardware investment wave is eroding net profit. The low base effect thus formed will significantly boost the year-on-year growth rate of Hong Kong stocks' earnings in 2027 (especially in the first half), and the earnings elasticity of Hang Seng Tech is expected to be far higher than that of the Hang Seng Index; going forward, the focus should be on internet platforms' capital expenditure and the improvement of domestic demand. On the valuation side, on the surface, the Hang Seng Index valuation indicator with a relatively high historical percentile cannot represent the true historical valuation percentile of the overall Hong Kong stock market, because the systematic repricing of the high-dividend sector, which carries a relatively high weight in the Hang Seng Index since 2023, has actually lowered the central volatility band of the index ERPif this repricing is restored, the current theoretical Hang Seng Index ERP is about 7.4%, so it is rather one-sided to assert that Hong Kong stocks as a whole are "not undervalued" based solely on broad-based valuations. Looking solely at the Hang Seng Tech Index, its valuation and earnings have both been sharply revised down simultaneously, and recently ERP even once approached the high level of April 2025, highlighting valuation cost-effectiveness. This year's valuation compression is a common phenomenon across large, mid, and small caps, indicating that the suppression comes more from beta-level risk appetite and liquidity. Moreover, over the past decade Hong Kong stocks have not yet experienced two consecutive years of valuation compression; in the years following the three valuation-compression years of 2018, 2021, and 2023 (2019, 2022, 2024), valuation repairs all occurred. Based on ERP model calculations, under the neutral scenario the Hang Seng Index's potential return in 2027 is approximately 14.62%; under the optimistic scenario the return could reach 33.24%; under the pessimistic scenario it is -7.28%. Risk warnings: Domestic macroeconomic conditions weaker than expected, with the real estate and consumer markets remaining weak; the trend of industry involution continuing, affecting the operations and profitability of relevant heavyweight companies and thereby dragging down overall market performance; risks in overseas financial markets such as AI investment spreading to Hong Kong stocks; geopolitical risks bringing a rapid rise in global risk aversion, with large fluctuations in some financial asset prices transmitting to other financial markets and causing liquidity crises; increased volatility in the RMB exchange rate, with foreign countries introducing new restrictive policies on investment, reducing overseas investors' willingness to allocate.