Characteristics and Pressure Assessment of the Current Hong Kong Stock Market Trend

Report Summary

1. The main reasons for the recent rise in Hong Kong stocks are, first, the correction of the decline at the end of the year (currency depreciation and the resulting passive downward adjustment of profit forecasts in Hong Kong dollars), and second, the technology theme igniting market sentiment before and after the Spring Festival. Unlike the top-down "policy bull" expected in 2024, this round of market activity is more of an "revaluation bull" at the industrial and corporate levels. If the pessimistic narrative is reversed, there is still significant room for China's core technology assets; however, in the short term, there are issues with the pace following a rapid rise (after this round of increases, the cumulative increase of China's core technology assets in 2024 has already surpassed that of the U.S. tech giants).

2. Compared to the two rounds of market activity in 2024, another prominent feature this year is the more extreme structural nature. Previously, the transaction proportion of 3% targets measured the deviation in trading, with three rounds showing 72.7%, 75.2%, and 77.4%; using the coefficient of variation of the Hang Seng secondary industry’s increase to measure industry performance deviation, the three rounds were 0.66, 0.51, and 0.89 respectively. This round of market activity is driven by a smaller range of companies pushing the index upward—currently, the Hang Seng Index and Hang Seng Tech's increase is basically on par with that of April-May last year, thus the possibility of structural overheating is higher than at that time (the rapid market activity in September-October 2024 is rare in the global capital market, making replication difficult).

3. Using the Hang Seng Index EPR to measure the current valuation rationality, as of the close on February 14, the Hang Seng Index ERP has fallen to 6.4%, very close to the past three years' average ERP -1.5X standard deviation, with the pressure points of last year's two rounds of market activity also around -1.5X (or quickly adjusted after breaking through). Static calculations show that when ERP【falls to -1.5X standard deviation position】,【falls to last year's absolute level on May 20】, and【falls to last year's absolute level on October 7】, the corresponding upper space is 0.5%, 3.1%, and 8.4% respectively. However, as mentioned earlier, this round of increase is driven by a small number of companies pushing the index upward, and the current ERP level may already imply a situation of structural overheating.

4. We still maintain our annual strategic view. The cyclical (real estate chain) proportion in the profit structure of Hong Kong stocks is high, and a sustained bull market relies on the confirmation of fundamental recovery. We are moderately optimistic about the mid-term market, as the real estate cycle has experienced a year and a half of accelerated clearing + expansion of the general fiscal deficit, which is expected to stabilize the profit cycle of the Hong Kong stock market.

Report Body

I. Overview of Hong Kong Stock Market After the Spring Festival

The main reasons for the rise in Hong Kong stocks after the Spring Festival are twofold: first, the recovery from the decline at the end of the year (due to the adjustment of the Federal Reserve's interest rate cut expectations and concerns about trade friction, the depreciation of the RMB exchange rate, and the resulting passive decline in profit forecasts denominated in HKD), and second, the technology themes such as large models and robots igniting market sentiment around the Spring Festival. Since February, the Hang Seng Index has risen by 11.8%, approaching the two peaks in January 2023 and October 2024; the Hang Seng Tech Index surged by 17.0% driven by the active performance of internet stocks, successfully breaking through last year's high and reaching a new high since 2022.

In terms of sectors, technology and manufacturing themes are overall leading, with consumer retail (+21.9%, including Alibaba Health), automotive and parts (+19.0%, including BYD), hardware equipment (+18.7%, including Xiaomi and Lenovo), discretionary consumer retail (+18.7%, including Alibaba, JD.com, and Trip.com), semiconductors (+17.8%, including SMIC), and software services (+17.3%, including Tencent and NetEase) leading the market.

Cyclical sectors, on the other hand, performed poorly overall, with the black commodity chain dragging down the South China Industrial Products Index. In the equity sector, consumer services (-5.2%, including Meituan), coal (-1.2%), steel (-1.2%), environmental protection (-0.4%), and enterprise services (-0.1%) led the decline.

II. Comparison of This Round of Market with Two Impulses in 2024

The Hong Kong stock market that started in mid-January is the third rapid rise since 2024. We summarize the three rounds of market as follows:


Specifically:

1. Market Drivers and Style Performance: The initiation of the two rounds of market rallies in 2024 is driven by a reversal in expectations regarding macroeconomic policies, trading on "bottom-line logic"; while the current rally is driven by bottom-up technological advancements at the industry and enterprise levels, leading to a "revaluation logic" for Chinese assets. In terms of style, both rounds of rallies in 2024 are led by the real estate chain, with non-bank and internet sectors also exhibiting strong pro-cyclical attributes; this round is led by technology attributes (internet platforms, tech hardware).

In fact, core technology assets in the Hong Kong stock market have already shown strong aggressiveness last year. By fitting the net value curves of the seven tech giants in the US (Apple, Microsoft, Google, Nvidia, Amazon, Tesla, Facebook) and the eight major tech leaders in Hong Kong (Tencent, Alibaba, Meituan, Xiaomi, BYD, JD.com, NetEase, SMIC), we can see that after this rapid rise, the cumulative increase of Hong Kong tech leaders has surpassed that of US tech leaders (Figure 1).

However, looking at the longer time frame, the cumulative increase since 2021 shows that the performance of Chinese tech leaders still lags far behind that of US tech leaders (since 2021, there has been a burst of the consumer core asset bubble, a turning point in the real estate cycle, etc., leading to a pessimistic narrative about Chinese assets). Therefore, if the stereotypes formed in the past few years begin to reverse, there is still significant room for the revaluation of top Chinese assets. Of course, the revaluation of assets will not happen overnight; in terms of rhythm, after a rapid short-term rise, there may be pressures from profit-taking, short-term fundamental realizations, and noise from overseas markets.

2. Duration and Magnitude of the Market Rally: Since the low point on January 14, 2025, after 21 trading days, the Hang Seng Index has risen by 19.9%, and the Hang Seng Tech Index has risen by 30.9%. In terms of sustainability and space, this is basically on par with the market rally in April-May 2024 (the Hang Seng Index's increase is slightly lower, while the Hang Seng Tech Index's increase is slightly higher). The increases in September-October 2024 were even larger and faster, but such a degree of rally is rare. We have compiled data from 10 stock markets (China, the United States, Japan, Hong Kong, Taiwan, France, the United Kingdom, Germany, South Korea, India) since 1990, and cases of weekly increases of 20% or more have only occurred 12 times, with 10 of those following systemic financial risks.


3. Degree of Structural Deviation: We calculate the proportion of the top 3% of stocks by trading volume in the Hong Kong stock market to the total trading volume on a monthly basis. This value has shown a trend of rising over the past 10 years, reflecting an increasing polarization in the Hong Kong stock market, even to the extent of a winner-takes-all scenario. Intuitively, when market sentiment and risk appetite improve, the marginal liquidity of small-cap stocks tends to improve more significantly. Therefore, during a bull market, the concentration of funds often decreases. In May and October of last year, the trading proportion of the top 3% of stocks also saw a decline. However, this year's market is exactly the opposite, with funds crowding more into large-cap stocks during the rapid market uptrend.

Specifically looking at the three segments of the uptrend, the trading proportions of the top 3% of stocks were 72.7%, 75.2%, and 77.4%, respectively; the coefficient of variation of the Hang Seng secondary industry index was 0.66, 0.51, and 0.89, respectively. Therefore, compared to the two pulses in 2024, this round of market movement is driven by a smaller number of companies, with structural enthusiasm being more extreme.

1. Valuation Pressure Assessment: We measure the current valuation position using the Hang Seng Index ERP (1/PE - weighted interest rate of 10-year government bonds in China and the U.S.). As of the close on February 14, the Hang Seng Index ERP fell to 6.4%, very close to the past three years' average ERP -1.5X standard deviation. Compared to the two market movements in 2024:

On May 20, 2024, the stock price peak corresponded to the Hang Seng Index ERP dropping to 6.1%, which was at the -1.5X standard deviation position, after which the market began to adjust; on October 7, 2024, the stock price peak corresponded to the Hang Seng Index ERP dropping to 5.6%, falling below the -1.5X standard deviation position, but it only stayed below for 4 trading days before the market began to adjust.

Static Assessment:

(1) If the ERP drops to the -1.5X standard deviation position, it corresponds to a rise of +0.5%;

(2) If the ERP drops to the absolute level of May 20 last year, it corresponds to a rise of 3.1%;

(3) If the ERP drops to the absolute level of October 7 last year, it corresponds to a rise of 8.4%.

However, as mentioned earlier, this round of increase is driven by a small number of companies pushing the index up, and the current ERP level may already imply a structurally overheated situation.

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III. Main Conclusions

1. The main reasons for the recent rise in Hong Kong stocks are, first, the correction of the decline at the end of the year (currency depreciation and the resulting passive downward adjustment of profit forecasts in Hong Kong dollars), and second, the market sentiment ignited by technology themes around the Chinese New Year. Unlike the top-down "policy bull" expected in 2024, this round of market movement is more of an "revaluation bull" at the industrial and corporate levels. If the pessimistic narrative is reversed, there is still significant room for China's core technology assets; however, in the short term, there are issues with the pace after a rapid rise (after this round of increase, the cumulative rise of China's core technology assets in 2024 has exceeded that of the US tech giants).

2. Compared to the two rounds of market movements in 2024, another prominent feature this year is the more extreme structural nature. Previously, a 3% target trading volume was used to measure trading deviation, with three rounds showing 72.7%, 75.2%, and 77.4%; using the coefficient of variation of the Hang Seng secondary industry’s rise to measure industry performance deviation, the three rounds were 0.66, 0.51, and 0.89 respectively. This round of market movement is driven by a smaller number of companies pulling the index upward—currently, the Hang Seng Index and Hang Seng Tech's rise is basically on par with last year's April-May, thus the possibility of structural overheating is higher than at that time (the rapid market movement in September-October 2024 is rare in the global capital market, making replication difficult).

3. Measuring the current valuation rationality with the Hang Seng Index ERP, as of the close on February 14, the Hang Seng Index ERP has fallen to 6.4%, very close to the past three years' ERP average -1.5X standard deviation, and the pressure points of last year's two rounds of market movements were also around -1.5X (or quickly adjusted after breaking through). Static calculations show that the ERP falling to -1.5X standard deviation, to the absolute level of May 20 last year, and to the absolute level of October 7 last year correspond to upper space of 0.5%, 3.1%, and 8.4% respectively. However, as mentioned earlier, this round of increase is driven by a small number of companies pushing the index upward, and the current ERP level may already imply structural overheating.

4. In terms of overall trend assessment, we maintain our annual strategy view. The cyclical (real estate chain) proportion in the profit structure of Hong Kong stocks is high, and a sustained bull market relies on the confirmation of fundamental recovery. We are moderately optimistic about the mid-term market, as the real estate cycle has experienced a year and a half of accelerated clearing + expansion of the general fiscal deficit, which is expected to stabilize the profit cycle of the Hong Kong stock market.

Author of this article: Liu Chenming (SAC Certification No.: S0260524020001), Xu Xiangzhen (SAC Certification No.: S0260524030005), Source: Chenming's Strategic Deep Thinking, Original title: “【Guangfa Strategy Liu Chenming & Xu Xiangzhen】Characteristics and Pressure Calculation of the Current Hong Kong Stock Market Trend”, edited by Wall Street Insight.

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