Huatai Hong Kong Stock Strategy: Internal and external policy resonance has not yet arrived, short-term dumbbell strategy may still be the best solution for Hong Kong stocks.

Huatai released a research report stating that October economic data was overall better than expected, which may reflect positive factors such as policy expectations, upstream prices, and inventory positioning. Further policy efforts are still needed for the improvement of endogenous momentum and real estate. This week, the loosening and tightening of overseas liquidity mainly reflects the slowdown in US inflation and consumer resilience. Despite the slowdown in inflation, the better-than-expected retail data may reflect the continued resilience of US household consumption. The shift in monetary policy by the Federal Reserve may still depend on the variable catalyst of the US stock market and household wealth effect. As of November 18th, the disclosure rate of core Hong Kong stocks (i.e., Hong Kong stocks that have released quarterly reports) was approximately 91%. Overall, profitability may have entered a stable recovery trend, and a comprehensive analysis of data and performance may still suggest a short-term dumbbell strategy as the optimal solution for Hong Kong stocks. Based on the analysis of quarterly reports and economic indicators, it is recommended to focus on the healthcare, electronics, automobile parts, and cyclical sectors. Huatai's main points are as follows: October economic data had highlights, and the focus may shift to policy games in the future. October economic data was better than expected: 1) It may reflect positive factors such as policy expectations, upstream prices, and inventory positioning. 2) Further policy efforts are still needed for the improvement of endogenous momentum and real estate. The industrial value-added in October slightly exceeded market expectations, indicating stronger visibility in active restocking. In terms of structure, upstream data showed differentiation but maintained high growth, while the midstream and downstream sectors were relatively weak. The year-on-year decline in real estate sales in October narrowed, which, apart from the low base effect of last year, also reflected certain policy effects. Attention should be given to the positive changes brought about by the financial work conference's emphasis on meeting the reasonable financing needs of real estate companies of different ownership. Looking ahead, fiscal policies (corresponding to central deleveraging), optimization of real estate policies (mainly in the three major projects), and the degree of recovery in endogenous economic momentum (reflected in employment and household consumption trends) are still core areas of focus in the future. US inflation is slowing down, but consumption remains resilient; the shift in monetary policy depends on variables in the US stock market Last week, the loosening and tightening of overseas liquidity mainly reflected the slowdown in inflation and consumer resilience. The US core CPI in October was lower than Bloomberg's consensus forecast, and housing rent was the main factor, with the Zillow rental index showing a continuous slowdown in rent thereafter. The "super core inflation," which the Federal Reserve is more concerned about (i.e., core services excluding rent), also slowed down (0.3% month-on-month in October, compared to 0.6% previously). However, the better-than-expected retail data (month-on-month -0.1%, Bloomberg consensus forecast -0.3%) may indicate that the impact of student loan repayments on consumer spending is not as significant as expected, and US household consumption still exhibits resilience. The shift in monetary policy may still depend on variables such as the US stock market and the household wealth effect. Dumbbell strategy may still be the optimal solution in the short term based on the analysis of quarterly reports As of November 18th, the disclosure rate of core Hong Kong stocks' quarterly reports was approximately 91%, and the net profit for Q3 2023 of core Hong Kong stocks as a whole increased by about 4.3% compared to the same period last year, higher than the 1.7% growth in Q2. Many major sectors, such as upstream resources, midstream manufacturing, essential consumption, and large financials, also showed a widespread trend of profit recovery, and only TMT (Technology, Media, and Telecommunications) and discretionary consumption growth rates were lower than the previous period due to the base effect, but still positive. From the perspective of the old and new economies, the new economy also showed a higher profit growth rate compared to the old economy, but lower than before. However, attention should be paid to the following points: 1) Some leading companies in the new economy claim that their cloud computing business may be affected by US semiconductor policies, and prospects may be revised downward; 2) The current economic data still shows that the recovery in the upstream is stronger than that in the downstream. Considering the current performance data and future expectations, the dumbbell strategy may still be the optimal solution for Hong Kong stocks in the short term. Combining the analysis of quarterly reports and economic indicators, healthcare, electronics, automobile parts, and cyclical sectors are recommended. 1) Healthcare: The pace of domestic and international new drug approvals has increased, with the number of domestic innovative drug Investigational New Drug (IND) applications accelerating year-on-year in October, and the forward-looking global pharmaceutical investment and financing cycle has been recovering for three consecutive quarters. 2) Electronics: Mobile phone exports performed well in October, global semiconductor sales have been rising for five consecutive months, and the forward-looking indicator, the North American Printed Circuit Board (PCB) Business Barometer, has been rising for six consecutive months. 3) Automobile parts: Automobile production and sales reached a new high for the same period in October, and exports remained resilient. The product cycle may continue to rise in November, and the forward-looking indicator, the Moving Average of the 3-month (MA3) operating rate of semi-steel tires, has rebounded. 4) In cyclical sectors, the prices and price differentials of varieties driven by manufacturing and completion-stage demand, including aluminum, rare earth, rubber, steel, and consumer building materials, have rebounded year-on-year. The current high visibility of active restocking may strengthen the logic of cyclical sector allocation. Risk warning: The domestic economic recovery falls short of expectations; the tightening of monetary policy exceeds expectations.