A few thoughts after the Hong Kong stock market surged again

After a brief adjustment yesterday, Hong Kong stocks surged again today, with afternoon real estate-related news boosting the performance of real estate stocks. The market is paying attention to the upcoming space, and we have updated several pieces of information based on the latest data for your reference.

As of today (closing on February 12), Hong Kong stocks are technically overbought overall (RSI at 74%), but the short-selling transaction volume has decreased compared to previous days, indicating that some divergences are diminishing or that short-squeezing is occurring due to the rise. The equity risk premium has dropped to 6.5% (it was 6.7% at the peak in May 2024 and 6% at the peak in October last year).

Overall, the conclusion is that sentiment is overdrawn in the short term. But is it extreme? Certainly not the most extreme; the sentiment from October is still relevant. If we "move over" the exuberant sentiment from the early October peak, it would correspond to the Hang Seng Index at around 23,000 points, which is not impossible but challenging.

So, is there foreign capital buying in? Currently, the data we have only covers up to last week (this week's data will be updated on Friday). The conclusion is: long-term foreign capital (holding type, most important) is absent, while short-term foreign capital (such as passive funds and trading funds) should be present, but the biggest issue with the latter is that it is not sustainable, similar to the wave at the end of September.

There are several interesting points about this wave of increase, which can also be seen as misconceptions. In fact, this time it is still a structural market overall, and it is a more extreme structural market, with only over 20% of stocks outperforming the index (in the 924 market, over 60% of stocks outperformed the index). However, it is possible for these small-range stocks to drive the overall index up and outperform A-shares, mainly due to: 1) the overall market cap of Hong Kong stocks is small; 2) Hong Kong stocks have more software stocks and large companies, which A-shares do not have; 3) in terms of index construction, the Hang Seng series indices artificially limit the individual stock weight cap to 8%, which makes the impact of small and medium-sized companies on the index more significant.

There are two possible paths ahead: one is to continue with the structure, where industry narratives are not falsified, and at worst, we could have a structural bull market similar to the smartphone and consumer electronics boom from 2012 to 2014, and the semiconductor and new energy sectors after 2019, or the "seven sisters" of the US stock market, but this requires continuous industrial realization as a foundation. If it cannot be realized, it will either revolve around this main line and spread to speculative outer areas, or it will focus on large companies that are most likely to realize.

The second path is to further expand to the overall market, but it requires two conditions: 1) technology changes and resolves the overall macro deleveraging and contraction issues, leading to a significant increase in total factor productivity and natural interest rates; 2) macro total policy coordination and reinforcement, such as today’s real estate news. However, with the current heat of AI and relatively mild tariffs, will this lead to a situation where total policies do not need to be too urgent? This needs to be observed.

Source: CICC Kevin Strategy Research