Performance patterns after the Hang Seng Technology Index rises over 6% in a single day

Summary

1. Historical performance of Hong Kong stocks after Hang Seng Technology rises over 6% in a single day:

On February 21, the Hong Kong stock market opened high and rose, with the Hang Seng Index and Hang Seng Technology closing up 3.99% and 6.53%, respectively. Historically, there have been 26 instances of Hang Seng Technology rising over 6% in a single day, of which 20 occurred during a downtrend as a rebound or at the early stage of a market bottom (more frequently after 2022), and 6 occurred during an acceleration phase in an uptrend. Based on historical experience, after a surge of over 6% in the acceleration phase, the probability of a decline in the following 1-2 weeks is higher, while there is no obvious pattern in the performance over a one-month period.

2. Valuation levels of Hong Kong stocks after 26 trading days:

As of the close on February 21, this round of market activity has lasted for 26 trading days, with the Hang Seng Index and Hang Seng Technology rising by 24.4% and 38.8%, respectively, surpassing the market performance from April to May 2024, but still lower than the performance from September to October 2024.

Using the Hang Seng Index ERP to measure current valuation rationality, as of the close on February 21, the Hang Seng Index ERP fell to 6.2%, slightly exceeding the past three years' average ERP by -1.5X standard deviation. Static calculations show that at three levels: [returning to -1.5X standard deviation], [returning to the absolute level of May 20 last year], and [returning to the absolute level of October 7 last year], the corresponding price changes are -1.0%, +1.5%, and +6.8%, respectively.

In a global horizontal comparison, after this round of increase, the price-to-earnings ratio percentiles of the Hang Seng Index and H Share 50 Index have reached mid-high positions over the past 10 years; especially the H Share 50 Index, driven by the internet sector, has seen its price-to-earnings ratio percentile rise above 90%.

However, in terms of valuation rationality, the valuation levels of Hong Kong stocks remain relatively reasonable in a global comparison; it is also important to note that the main factor limiting the upward movement of the valuation center of Chinese assets is still the profit level.

3. Attention to the shift in trading logic after March:

Based on the calendar patterns of policies, financial reports, resumption of work, and liquidity, after March, the annual policy implementation, preliminary announcements of Hong Kong stock annual reports, and the start of spring work will gradually shift the market to a trading based on economic conditions. For the short-term market, we believe that the purely thematic excitement phase may be coming to an end, and the market trading logic will gradually switch to the realization of substantial fundamentals, with increased volatility in the previously high-performing technology growth sectors. 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.

Risk warning: Technological progress at the industrial level may fall short of expectations; deterioration of the overseas economic situation and negative impacts from adjustments in the U.S. stock market; changes in the international political environment (China-U.S. friction, geopolitical issues, etc.) may bring additional shocks; domestic economic growth and stability policies may fall short of expectations (exports exceeding expectations dragged down by overseas demand, difficulty in restoring consumer confidence in real estate, etc.).

Report Body

1. Historical performance of Hong Kong stocks after Hang Seng Technology rises over 6% in a single dayOn February 21, stimulated by Alibaba's financial report [performance + capital expenditure] exceeding expectations and the State-owned Assets Supervision and Administration Commission's deployment of "AI+" for central enterprises, the Hong Kong stock market opened high and rose further, with the Hang Seng Index and Hang Seng TECH Index closing up 3.99% and 6.53% respectively; weekly gains were 3.79% and 6.03%; Alibaba-W saw gains of 14.56% and 11.60% on Friday and for the week respectively. Meanwhile, market volatility and divergence have also increased.

Prior to this, there have been a total of 26 instances in history where the Hang Seng TECH Index rose more than 6% in a single day, of which 20 occurred during market downturns as rebounds or at the initial stages of market bottoms (more frequently after 2022), and 6 occurred during accelerated phases of upward trends. Based on historical experience, after a surge of over 6% in an accelerated phase, the probability of a decline in the following 1-2 weeks is higher, while the performance over a one-month period shows no clear pattern.

II. Valuation Levels of Hong Kong Stocks After 26 Trading Days

The Hong Kong stock market rally that started in mid-January is the third rapid increase since the beginning of 2024. As of the close on February 21, this round of rally has lasted for 26 trading days, with the Hang Seng Index and Hang Seng TECH Index rising 24.4% and 38.8% respectively, significantly exceeding the rally from April to May 2024. The gains in September-October 2024 were even larger and faster, but replicating a similar rally may be difficult. We have compiled data from 10 stock markets including China, the United States, Japan, Hong Kong, Taiwan, France, the United Kingdom, Germany, South Korea, and India since 1990, and cases of weekly gains exceeding 20% have only occurred 12 times, with 10 of those being rebound surges following systemic financial risks.

Using the Hang Seng Index ERP (1/PE - weighted interest rate of 10-year government bonds in China and the U.S.) to measure the current valuation position, as of the close on February 21, the Hang Seng Index ERP has fallen to 6.2%, slightly surpassing the three-year ERP average -1.5X standard deviation. Compared to the two rounds of rallies in 2024:On May 20, 2024, the peak stock price corresponded to the Hang Seng Index ERP falling to 6.1%, which is at -1.5X standard deviation position, and the market subsequently began to adjust; on October 7, 2024, the peak stock price corresponded to the Hang Seng Index ERP falling to 5.6%, breaking below the -1.5X standard deviation position, but it only stayed below for 4 trading days before the market began to adjust.

Static Calculation:

(1) If ERP returns to the -1.5X standard deviation position, the corresponding increase is -1.0%;

(2) If ERP returns to the absolute level of May 20 last year, the corresponding increase is +1.5%;

(3) If ERP returns to the absolute level of October 7 last year, the corresponding increase is +6.8%.

In a global horizontal comparison, after this round of increase, both the Hang Seng Index and the H Share 50 Index have reached a mid-high position in the PE percentile over the past 10 years (Figure 3); especially the H Share 50 Index, driven by the internet market, has seen its PE percentile rise to over 90%.

However, from the perspective of valuation rationality, the valuation level of Hong Kong stocks remains relatively reasonable in a global comparison (Figure 4); it should also be noted that the main factor limiting the upward movement of the valuation center of Chinese assets is still the profit level. East Asian economies dominated by manufacturing + the German market have similar issues, namely low profits matching low valuations.

The industry and key valuation levels are detailed in Figures 5-6. Figure 5 shows the current PB & ordinary return on equity for 2025E under the GICS classification of A-shares, Hong Kong stocks, and U.S. stocks; Figure 6 filters the stocks with the highest institutional attention based on the number of analyst ratings.

3. Pay attention to the change in trading logic after March

Starting from the calendar rules of policies, financial reports, resumption of work, and liquidity, the trading logic from the fourth quarter to the first quarter each year is roughly as follows: trading high growth in Q3 reports + quality of autumn resumption of work in September-October; after November, the resumption of work turns weak + financial report gap, trading December's policy expectations and the resulting valuation switching market; December's policy is set, with a game of expectations versus reality and differences in understanding of policy setting; at the end of the year and the beginning of the year, there is no incremental information on policies, and the fundamentals are relatively vague, with the market mainly driven by policy expectations, liquidity, and technology themes; after March, the annual policy division is implemented, preliminary announcements of Hong Kong stock annual reports are disclosed, and spring resumption of work starts, with the market gradually switching to prosperity trading.

In the past two months, the Hong Kong stock market has shown desensitization to both fundamentals and valuations. On one hand, there is desensitization to the expectation of interest rate cuts by the Federal Reserve and U.S. Treasury yields. Since the launch of Trump Trade 2.0 in November last year, until mid-January this year, the Hang Seng Index had a significant mirroring characteristic with the probability of the Federal Reserve cutting rates once (in the past three months, the expectation of the Federal Reserve cutting rates for the entire year was 1-2 times—i.e., fluctuating between 25bp-50bp), while in the past month, the performance of Hong Kong stocks was no longer affected by fluctuations in Federal Reserve policy expectations.

On the other hand, there is desensitization to fundamentals. Due to the high proportion of the financial cycle in the market capitalization structure of Hong Kong stocks (the internet sector also has a certain cyclical attribute), historically, there has been a high positive correlation between the valuation of Hong Kong stocks and the growth rate of medium- and long-term loans reflecting the real economy's prosperity (Figure 8, with a correlation coefficient of 0.66 from 2005 to 2023). This relationship has loosened somewhat since last year, with a greater divergence in the first two months of this year—24H1 net profit growth in the information technology sector of Hong Kong stocks nearly doubled, which is a key factor supporting the stabilization of core technology assets in Hong Kong stocks;This year, with the performance base of the Hang Seng Internet sector raised, the role of macro fundamentals may marginally increase.

Therefore, for the short-term market, we believe that the purely thematic excitement phase may be coming to an end, and the market trading logic will gradually switch to the realization of substantial fundamentals, with increased volatility in the technology growth sector that has seen significant gains previously. The profit structure of Hong Kong stocks has a high proportion of cyclical sectors (real estate chain), and a sustained bull market relies on the confirmation of fundamental recovery.

Authors of this article: Liu Chenming: SAC License No.: S0260524020001, Xu Xiangzhen: SAC License No.: S0260524030005, Source: Deep Thoughts on Strategy by Chenming, Original Title: "Deep Thoughts on Strategy by Chenming"Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, 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