Last week, the Hong Kong stock market continued its strong momentum after the Spring Festival and accelerated its rise, with the market's enthusiasm for the revaluation of technology stocks and even overall Chinese assets triggered by DeepSeek continuing to spread. The Hang Seng TECH Index surged 7.3%, surpassing the high point of last October, reaching a new high since early 2022, while the Hang Seng Index also rose 7.0%, just a step away from the high point of 23,100 in early October last year. In contrast, the CSI 300 only saw a slight increase of 1.2%. In terms of sectors, compared to the previous week’s rise primarily driven by AI-related hardware and software, last week’s gains further spread to the AI+ sector, including internet, healthcare, and consumer sectors. Specifically, consumer discretionary (+11.1%), media and entertainment (+10.1%), and real estate (+8.7%) led the gains, while the energy sector declined (-0.4%), and utilities (+0.6%) and diversified financials (+0.7%) lagged behind.In just two weeks after the Spring Festival, the AI boom led by DeepSeek has brought significant changes to investor sentiment and macro narratives. At this point, who are the main buyers, have foreign investors changed their views, what are the similarities and differences in this round of rebound, and how much room is there for growth? These are all questions of great concern to investors, and we analyze them as follows.Chart: Hong Kong stocks have surged significantly since mid-January, clearly outperforming A-sharesSource: Wind, FactSet, CICC Research DepartmentChart: Hong Kong stock market leads globallySource: Wind, FactSet, CICC Research DepartmentChart: In the past week, Hong Kong stocks in consumer discretionary, media and entertainment, and real estate led the gains, while energy fell against the trendSource: Bloomberg, Wind, CICC Research DepartmentI. Characteristics and Differences of This Round of Rebound: Emotion-Driven, Trading Funds Dominating, More Focused StructureAfter the Spring Festival, the rapid rise led by Hong Kong stocks, especially the Hang Seng TECH Index, easily reminds everyone of the similarly rapid rise during the 924 rally. Comparing the two, we can find that the similarity lies in both being emotion-driven and dominated by trading funds, while the difference is that this round of market is more focused on the AI-related technology sector, with a more pronounced structural aspect, which also explains the significant lag of the financial cycle sector within Hong Kong stocks and the A-share market.► Similarity: Primarily emotion-driven, dominated by trading and passive funds. In terms of driving force, both the recent surge and the 924 rally were mainly driven by emotions. From September 24 to October 7, in just two weeks, total policy and expectation changes drove the Hang Seng Index to rise by 21.6%, with risk premium contributing 19.8%. The main catalyst for this round of surge is the re-evaluation sentiment towards technology and overall Chinese assets brought by DeepSeek's "breaking the circle." In the two weeks since the Spring Festival holiday, the Hang Seng Index has risen by 11.8%, with our calculations showing a risk premium contribution of 10.2%.Chart: The risk premium contribution is the main driving force in this round of marketSource: Bloomberg, FactSet, Wind, CICC Research DepartmentIn terms of funding, both rounds of rebound are mainly driven by trading and passive funds, with limited return of active funds. Specifically, 1) Recent inflows of southbound funds have increased, but divergences have also widened. Last Monday and Wednesday saw outflows, while the main inflow was into Alibaba, but outflows occurred from previously strong performers Xiaomi and Tencent. Overall, since the Spring Festival holiday, the cumulative inflow of southbound funds has reached HKD 26.6 billion, which is comparable to the inflow scale of southbound funds during the 924 rally (approximately HKD 25.9 billion). 2) Active foreign capital continues to flow out (accounting for 50-60% of the stock), and is not the main force behind this round of rise. This type of capital tends to be relatively lagging but holds long-term. During the 924 rally, active foreign capital had to replenish positions with an inflow of about USD 720 million due to slightly underperforming the index for two weeks, but has continued to flow out since mid-October. As of now, active foreign capital continues to flow out, indicating that it remains cautious. 3) Inflows of passive ETF funds have increased (accounting for 15-20% of the stock), which may mainly consist of individual investors, with a cumulative inflow of about USD 1.94 billion in this round, far below the inflow scale of USD 9.75 billion during the 924 rally4) Trading funds (such as hedge funds, accounting for 5-8% of the total) should also see inflows, and may even become the main force in a phased manner. Compared to long-term foreign capital as the main force, passive and trading funds are more flexible and speculative, so we suggest that the behaviors of these two types of funds should not be directly equated with the views of long-term foreign capital (《Who is the main force buying in this round of rise?》).Chart: EPFR data shows that passive foreign capital has continued to flow back over the past seven weeks, while active funds are still flowing out.Source: Bloomberg, FactSet, Wind, CICC Research DepartmentIt is undeniable that the above two characteristics are also inevitable phenomena in the early stage of a rebound. After all, the early stage is mainly based on expectations, and trading and passive funds act faster than long-term funds. However, if expectations cannot be fulfilled in the subsequent period, or even continue to fall short of expectations, it will lead to a reversal of the overstretched sentiment, causing the inflowing trading and passive funds to flow out again, making it difficult for long-term funds to enter. This is also what happened after the market corrected from its peak in early October.► Differences: Compared to the 924 market, which was mainly driven by the financial and real estate cycle and had a broader rebound foundation, this round of rise is more narrowly focused on the technology sector. On one hand, among the 547 Hong Kong Stock Connect samples, only 20% of the stocks in this round outperformed the index, mainly concentrated in the technology consumption and AI medical fields, while the old economy and traditional sectors mostly lagged; in the 924 market, over 60% of the stocks outperformed the index, mainly in cyclical sectors such as finance and real estate.Chart: The market focuses on the technology sector, with the proportion of companies outperforming the index being only about 20%...Source: Bloomberg, Wind, CICC Research DepartmentChart: ...far less than the over 60% outperforming ratio in the 924 market. rose 24% during this period, contributing 18% to the risk premium, which accounted for 70% of the 11.8% increase in the Hang Seng Index during the same period, and the risk premium also reached a new low since early October last year. The remaining 68 constituent stocks only rose 5.8%, showing a clear divergence. Although the market expanded somewhat last Thursday and Friday, it still revolved around the AI+ logic, with leading sectors including healthcare services and e-commerce internet.Chart: Most constituent stocks of the Hang Seng Index showed insignificant increasesData source: Bloomberg, Wind, CICC Research DepartmentChart: Risk premium declines and diverges, with no significant adjustment in the risk premium of other constituent stocksData source: Bloomberg, FactSet, Wind, CICC Research DepartmentSo why can such a small range of individual stocks drive a rebound at the overall index level and significantly outperform A-shares? We believe the main reasons include: 1) The overall market of Hong Kong stocks is relatively small and more concentrated in leading stocks, with less capital volume, so a small number of individual stocks and funds have a stronger effect on the index than A-shares; 2) In terms of industry structure, Hong Kong stocks have more software and internet leading companies, which are the main force behind this round of increases, explaining the differences between the two markets; 3) In terms of index construction, the weight limit for individual stocks in the Hang Seng series indices is 8%, so significant increases in small and medium-sized companies have a greater marginal contribution to the index weight.Therefore, essentially, this round of rebound is still a typical structural market, meaning that investors need to focus more on allocation to outperform the index, which is consistent with our judgment of "structure is the main line" proposed in our outlook at the end of last year (《港股 2025 年展望：密云不雨》). Such a focused structural market has both advantages and disadvantages: 1) The advantage is that it does not need to rely too much on macro total policy coordination; 2) The disadvantage is that the upward basis is too narrow, requiring continuous catalysis from the technology sectorII. The Outlook for China's Asset Revaluation: Static Overdraft, Implying Increased Volatility and More Catalysts Needed; But Mid-term May Facilitate a More Obvious Structural MarketThrough the above analysis of the characteristics of this rebound, we can clearly see that the essence of this round of rebound is built on optimistic sentiment towards technological trends. The extent to which this sentiment is accounted for and how much "imagination" space remains for the future is key to answering the future market space, and is also the main divergence between optimists and cautious investors. Cautious investors see more short-term overdrafts in valuation, sentiment, and technical aspects, as well as variables in future expectations; optimists see more significant valuation revaluation, capital reallocation, corporate innovation capabilities, willingness for capital expenditure, and even potential shifts in the overall macro narrative brought about by this opportunity.We believe that the current situation is that the "direction" of the macro narrative is undoubtedly correct, but the "extent" cannot be confirmed or falsified. Different investors assign different risk premiums based on "extent" assumptions, leading to different index spaces.Therefore, in judging the future index space, we believe we can approach it from two perspectives:► From a static perspective, sentiment and valuation are undoubtedly overdrawn in the short term. Technical indicators show signs of overdraft, such as the relative strength index (14-day RSI) rising to 78.3 (the early October high was 90.9), and short-selling transactions have also increased, similar to the divergence within southbound capital. In terms of sentiment, after this round of increase, the risk premium of the Hang Seng Index has fallen to 6.15%, close to the 6% level corresponding to the market peaks in early October last year and early 2023. In other words, the current market accounts for the level of optimism that investors had at those two time points regarding future expectations. Conversely, if we substitute a 6% risk premium into the current environment, assuming that the risk-free interest rate and earnings are unlikely to change significantly in the short term, then the Hang Seng Index level corresponds to around 23,000 points.Chart: The relative strength index (14-day RSI) has basically remained in the overbought range above 70% this weekSource: Bloomberg, Wind, CICC Research DepartmentChart: The proportion of short-selling transactions in Hong Kong stocks has declined, with some divergences reduced or forced short covering due to the rise. Under this dichotomy, if we assume that the sentiment for other sectors remains unchanged, and the optimistic sentiment for the technology sector rises further to the level at the beginning of 2023, it corresponds to the Hang Seng Index being around 24,000 points; if the optimistic sentiment for technology stocks returns to the historical peak of 2021, it corresponds to the Hang Seng Index at 25,000 points.Chart: Assuming that the sentiment for other sectors remains unchanged, further allowing the optimistic sentiment for the technology sector to rise to the level at the beginning of 2023 corresponds to the Hang Seng Index being 24,000 points.Data source: Bloomberg, FactSet, Wind, CICC Research DepartmentIt should be noted that whether it is the level calculated based on risk premium or the overdrawn technical indicators, it does not mean: 1) that this position cannot be surpassed, as the short-term exuberance of sentiment and funds can easily lead the market to rise further, and the current level has not yet reached that of early October; or 2) that touching this position will lead to a significant pullback, as the pullback after October was also phased, initially just a partial retraction of overdrawn sentiment, while subsequent declines were due to more unexpected factorsTherefore, the more accurate meaning of the above indicators is that continuing to rise at this position requires a more optimistic assumption as a premise, and at the same time, it also needs to bear more volatility risks. Thus, it is more likely to oscillate here to digest part of the expectations while waiting for subsequent catalysts.► From a dynamic perspective, whether the long-term technology trend and macro narrative can be realized is key to unlocking greater upward space. After all, the role of profits in the market is far from comparable to the short-term risk premium, which is also the current divergence in the market regarding how quickly and to what extent industrial trends can be realized.However, one thing is certain: the current market may be moving towards a "structural market" similar to that of 2012-2014 and after 2019 that we expect. (《Hong Kong Stock Market Outlook for the Second Half of 2024: The Path of Enlightenment》). The macro conditions for a structural market have two aspects: First, the overall economy is in a phase of structural adjustment or stabilizing leverage, thus lacking an overall trend. For instance, from 2012 to 2014, there was also supply-side excess, and PPI remained negative; in 2019, there were trade frictions and the financial deleveraging of 2018. At this time, the overall market may present a volatile pattern, especially for cyclical sectors that are more related to the macro economy, making it difficult to expect significant upward movements like during the leverage-increasing period (such as from the end of 2014 to mid-2015 when the secondary market leveraged up, and from 2016 to 2017 when residents leveraged up, and early 2020 to 2021 when the government and residents leveraged up) ; second, there are established industrial trends that can drive sufficient funds into these sectors to form an independent structural market. If there is no clear and consensus industrial trend, it will replay the previous liquidity-driven rapid rotation of small-cap stocks without a main line, making it difficult to form a trend. However, if there is a clear industrial trend, even if the overall market is volatile, there can still be a strong structural trend (such as the consumer electronics and media mobile game markets driven by smartphones and the transition from 3G to 4G from 2012 to 2014; the self-controllable semiconductor and new energy industries in 2019, etc.). Therefore, if the subsequent development of the AI industry continues to strengthen, it can form a structural market similar to the previous two segments. If it cannot be realized, the market may phase around the AI main line and expand outward, but ultimately focus on the leading parts that are most likely to be realized.Chart: Clues from the Chinese market over the past decade: Direction of leverageSource: Wind, CICC Research DepartmentChart: Structural markets in consumer electronics, media mobile games, etc., driven by smartphones and the transition from 3G to 4G from 2012 to 2014Source: Bloomberg, Wind, CICC Research DepartmentChart: 2019 Structural Market Trends in Self-Controlled Semiconductor and New Energy IndustriesSource: Bloomberg, FactSet, Wind, CICC Research DepartmentChina is currently in a phase of overall stable leverage (the private sector is no longer deleveraging, while the government is moderately increasing leverage to hedge). In January, new social financing increased by 583.3 billion yuan year-on-year, M1 year-on-year growth rate fell from 1.2% in December last year to 0.4%, and M2 year-on-year growth rate fell from 7.3% in December to 7%. The credit cycle is marginally stabilizing, but sustainability remains to be observed. The domestic credit contraction issue has not been fully resolved, and challenges such as slowing population growth, the real estate downturn cycle, and external geopolitical landscape still exist. In this context, unless there is a significant fiscal leverage increase in overall macro policies (we previously estimated that an "additional" and "one-time" new fiscal deficit of 7-8 trillion yuan is needed to address the output gap and credit contraction issue, but we believe there are many "realistic constraints"), otherwise, a structural market trend is more likely, which is also a better scenario, as it can generate a profit effect that aligns with industrial trends while avoiding backlash after each round of excessive leveraged overextension.To further diffuse into the overall market, it requires 1) Technology to change and solve the overall macro deleveraging and contraction issues, leading to a significant rise in total factor productivity and natural interest rates, but this trend is relatively long-term; 2) Macro total policies to be reinforced, with the Two Sessions being an important observation window. However, recent easing of tariff pressures, strong economic data, and excitement brought by DeepSeek in the industry may lead to a slowdown in policy progress, which needs to be observed.In summary, we suggest observing or even moderately taking profits around the 23,000-24,000 point range before deciding on the next step: 1) In the short term, catalysts directly related to the technology sector as the main line of the rise, whether they can continuously emerge (such as entrepreneur forums), will require more and higher catalysts on the already high expectations; 2) The policy signals from the Two Sessions in the coming weeks regarding overall policies (such as fiscal deficits and special bonds), if exceeding expectations, can catalyze the rebound of other currently lagging cyclical sectorsIf the results are below expectations, it may exacerbate the currently overdrawn sentiment, leading some investors to seek to realize profits in stages.Author: Liu Gang (S0080512030003), Wang Muyao, et al., Source: CICC Insights, Original Title: "CICC: Re-evaluation of Chinese Assets?"Risk Warning and DisclaimerThe market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk