Chen Guo: The seven most critical issues in Hong Kong stocks currently

Recently, the Hong Kong stock market has been mainly driven by industrial catalysts, with DeepSeek emerging to push China's AI industry into a new phase. Since the end of January, the Hong Kong stock market has rapidly rebounded under the leadership of the technology sector. In terms of capital structure, foreign capital has had a strong short-term impact, while southbound capital continues to flow in steadily, becoming the main source of long-term incremental funds for the Hong Kong stock market. Looking at the subsequent trends, capital attention may shift from technology stocks to value stocks. In the long term, we believe the bull market in Hong Kong stocks will continue.

Summary

What is the main driving force behind the current rebound in Hong Kong stocks?

This round of market activity began at the end of January, mainly driven by DeepSeek's influence on industrial expectations. The vast majority of participating funds are concentrated in the technology sector, especially in areas related to domestic AI applications.

How does this round of Hong Kong stock market activity differ from the two rounds in May and September last year?

The activity in May last year was driven by foreign capital's reallocation in the Asia-Pacific region, dominated by capital logic; the September activity was influenced by unexpected reforms in China's capital market, driven by macro policies; this round is catalyzed by industry.

Has foreign capital participated in this round of Hong Kong stock market rebound? What is the outlook for foreign capital?

Foreign capital has participated, but it has shown a pulsing characteristic. Foreign capital quickly flowed in for certain reasons in the short term, but once the logic reverses, hedge funds will continue to sell.

Has southbound capital participated in this round of Hong Kong stock market rebound? What is the outlook for southbound capital?

Southbound capital is the core source of funds in this round of market activity, mainly concentrated in the dividend and internet sectors. Southbound capital will continue to be an important force driving the rise of Hong Kong stocks. The difference in funding costs between domestic and foreign capital provides a basis for the inflow of southbound capital. Considering that the U.S. is likely to slow down its interest rate cuts this year, this phenomenon is expected to continue for a long time.

Is the current rebound in Hong Kong stocks nearing its peak in the short term?

This round of rebound has entered the mid-stage, and the focus of capital attention may gradually shift from technology stocks to value stocks.

If the Hong Kong stock market peaks in the short term, which sectors will be relatively resilient?

Investors are advised to continue focusing on leading companies in the dividend and internet sectors.

In the long term, has the bull market in Hong Kong stocks been established?

The bull market in Hong Kong stocks is expected to continue, as liquidity, valuation, and profit cycles are all in a recovery phase, and further upward momentum will be driven by policy support and economic recovery.

Main Text

1. Introduction

In the fourth quarter of last year, the Hong Kong stock market faced continuous adjustments, with pessimistic sentiment prevailing. When the Hang Seng Index first fell below 20,000 points at the end of last year, we released a report indicating that the long-term factors in the current Hong Kong stock market had reversed, and the adjustment presented a layout opportunity. In January, with the catalysis of the AI industry, the market ended its adjustment and welcomed a new round of upward movement. This report will focus on the seven most critical questions regarding the current Hong Kong stock market.


2. What are the main driving forces behind the recent rebound in Hong Kong stocks?

The emergence of DeepSeek has quickly ignited the A-share and Hong Kong stock markets. Since mid to late January, driven by market sentiment, the Hang Seng Index has begun a new round of rebound, reaching over 22,000 points by February 14, with a cumulative increase of nearly 20%; the Hang Seng Tech Index has soared from its January lows to around 5,500 points, with a cumulative increase of over 30%, even briefly breaking through the highest point of 2024, becoming the main beneficiary of this wave of market.

The direct reason is the expectations for China's AI industry brought by DeepSeek. This round of market rally clearly began to recover at the end of January, during the Spring Festival period, when there were many macro-level uncertainties, including Trump's trade war and the FED's pause on interest rate cuts. Therefore, unlike past rallies driven mainly by policies or economic recovery, the driving factors for this round of recovery almost entirely come from industrial catalysts. From the ranking of industry gains in this round of Hong Kong stocks and the proportion of trading volume, it can be seen that the vast majority of participating funds are concentrated in the technology sector, especially in sectors related to domestic AI applications.

DeepSeek has triggered significant fluctuations in global markets, causing a short-term impact on U.S. tech stocks. As a giant in the AI field, NVIDIA continues to maintain a significant lead in the global tech industry with its leading GPU technology and comprehensive software ecosystem. However, the success of DeepSeek has disrupted this situation and may completely change the traditional competitive landscape. Morgan Stanley's recent report has lowered NVIDIA's 2025 GB200 chip shipment forecast from 30,000 to 35,000 units down to 20,000 to 25,000 units In the worst-case scenario, the shipment volume may fall below 20,000 units. One of the main reasons is the emergence of efficient open-source models like DeepSeek, which has weakened the market's potential demand for computing power. As of February 14, NVIDIA's stock price has cumulatively dropped by 18.61% from its January peak, with a market value evaporating by over $346.288 billion. At the same time, the stock price of its related industry chain company, Zhongji Xuchuang, has also been affected, experiencing a rapid decline. In contrast, the Hong Kong stock market has benefited from the positive factors of DeepSeek, with the AIGC concept sector continuously rising to 1165 points, far exceeding the peak level of 2024.

The significant opportunity in the Hong Kong stock market lies in the AI+ sector, where several leading companies are rapidly laying out plans and launching products and services based on DeepSeek, driving stock prices to rise sharply. In the AI medical field, DeepSeek technology has quickly covered multiple areas including drug research and development, clinical diagnosis, and health testing. Alibaba Health has performed outstandingly, continuously leading the AI medical sector with a year-to-date increase of over 70%. Yidu Tech, JD Health, and others are also experiencing continuous growth. In the AI automotive sector, major car manufacturers are responding by integrating DeepSeek. XPeng's chairman, He Xiaopeng, stated that DeepSeek will drive the software and hardware transformation of the automotive industry in the next decade. In the cloud computing service provision sector, companies like Kingsoft Cloud, Tencent Cloud, and Alibaba Cloud have successively integrated DeepSeek technology, continuously accelerating the popularization of cloud computing and driving rapid growth in computing power leasing and AI service revenue for cloud service providers. As a result, the stock prices of these three companies have seen significant increases, with year-to-date growth rates of 30.91%/17.75%/45.63%, respectively. In the generative AI field, Meitu has become the leader in this wave of growth, with its two major products, Meitu Xiuxiu and Meiyan Camera, showing year-on-year performance increases, and the daily user count for AIGC image processing features exceeding 21 million.

![](https://mmbiz-qpic.wscn.net/mmbiz_png/9ns8I2LyRiboOK18Xzhqia0bgPLibib4BMHvbicIQQX2F74xia7N6iahWiaBYsBBgkFyWBZApRIqrzmopZ9ReJQ1zmLc0w/640? 3. How is this round of Hong Kong stock market different from the two times in May and September last year?

Review of the May 2024 Market

The market in May 2024 mainly stemmed from the reallocation of foreign capital in the Asia-Pacific region, which is a matter of capital logic. Since August 2023, foreign capital has concentrated on withdrawing from AH shares, with capital in the Asia-Pacific region primarily flowing to Japan. At that time, the market was betting on the dual appreciation of Japanese stocks and the yen after the normalization of Japan's monetary policy. However, this logic was debunked in early 2024 when the Bank of Japan began raising interest rates, leading to a rapid depreciation of the yen, which was the most severe among major non-U.S. currencies. As a result, some capital flowed back to Hong Kong in April-May 2024. This is also the core reason why, since the Bank of Japan's interest rate hike on March 19, the Nikkei index lagged behind developed markets while the Hong Kong stock market led the gains. Therefore, this round of increase is not closely related to the fundamentals, and after a rapid rise, the Hong Kong stock market subsequently turned to a continuous decline.

Review of the September 2024 Market

The market in September 2024 mainly originated from the unexpected reforms in China's capital market, which belong to macro policy logic. The package of policies introduced on September 24 directly boosted the economy and capital market, with the intensity of the policies far exceeding expectations. Subsequently, the policy was further strengthened at the Central Political Bureau meeting on September 26, reigniting the market once again. By the close on September 30, the Hang Seng Index broke through 21,000 points. However, on the first trading day after the National Day holiday, the Hong Kong stock market experienced a significant correction, and market sentiment gradually returned to rationality. The main reasons are: 1) Tightening overseas liquidity. The U.S. non-farm employment and CPI in September exceeded expectations, driving U.S. Treasury yields and the dollar index higher, thus the tightening overseas liquidity prompted foreign capital to flow out of the Hong Kong stock market. 2) The institutional characteristics of the Hong Kong stock market are evident, with a low acceptance of thematic trading. Foreign and local institutional investors account for about 35% and 20%, respectively, which leads to a significant decline in trading enthusiasm after the overall market sentiment retreats.

Review of the Current Market

DeepSeek has made significant breakthroughs in China's AI field. On January 20, 2025, the DeepSeek-R1 inference model was officially released. As an open-source model, DeepSeek's performance is comparable to OpenAI's o1, particularly excelling in tasks such as mathematics, coding, and natural language reasoning. Additionally, its pricing is highly competitive, with API costs at only 3.7% of OpenAI's o1, requiring just 16 RMB per million output tokens, far lower than OpenAI's 438 RMB. With high performance and low costs, coupled with accelerated information dissemination during the Spring Festival, DeepSeek continues to attract market attention. From the trend of user numbers, the app's download volume is steadily increasing, with daily downloads on iOS nearing 300,000. Moreover, since January 26, DeepSeek has consistently ranked first in both the overall and application charts (free chart) in China.

This market trend demonstrates positive sentiment towards the domestic artificial intelligence sector and strong confidence in the future development of AI. Firstly, companies in the technology sector such as Tencent, Alibaba, and Kingdee International have rapidly implemented and applied this technology, leading to heightened market sentiment and optimistic future expectations from investors. Secondly, there is a global market re-evaluation of the value of Chinese technology assets, with continuous inflows of southbound funds and favorable views from foreign capital, further accelerating the rise of Hong Kong stocks.

IV. Is Foreign Capital Participating in the Current Recovery of Hong Kong Stocks? What is the Outlook for Foreign Capital?

Foreign capital is participating. From the exchange rate of the US dollar to the Hong Kong dollar, it can be seen that since the end of January, the Hong Kong dollar has gradually strengthened, coinciding with the release of DeepSeek. Additionally, the short-selling ratio of Hong Kong stocks, which can well represent the sentiment of foreign hedge funds, has also declined during the same period. Recent views from major foreign investment banks on the Chinese region have also turned positive around the same time.

The role of foreign capital in Hong Kong stocks is mainly impulsive. From the market trends in May and September of last year, it is evident that foreign capital quickly flowed in for certain reasons in the short term, but once the logic reversed, hedge funds would continue to sell. Moreover, after Trump's administration, the uncertainty of international relations faced by foreign capital has increased, so if a macro-level black swan event occurs in the future, the attitude of foreign capital may also change, making it unwise to rely on it as the fundamental support for the Hong Kong stock market.


5. Has the southbound trading participated in this round of Hong Kong stock rebound? What is the outlook for southbound trading?

The participation of southbound trading has increased in this round of Hong Kong stock rebound, showing a trend of continuous accumulation. From the beginning of the year to date, the cumulative net purchase amount of southbound funds has reached HKD 152.191 billion, a significant increase compared to the same period last year. Recently, the overall trend of net inflow of southbound funds in Hong Kong stocks remains strong. As of February 18, the single-day net inflow was HKD 22.4 billion, marking the largest single-day purchase day in nearly four years.

The inflow of southbound funds shows a certain structure, with the main buying sectors being dividends and the internet. From the perspective of industry allocation, Hong Kong stocks have continued to favor the dividend sector in the past month, with net inflows in the banking sector reaching HKD 16.4 billion, accounting for over 25% of total inflows. Major stocks include Industrial and Commercial Bank of China, China Merchants Bank, and Bank of China. In terms of individual stock net inflows, there is a concentrated allocation towards leading technology companies. Alibaba Group-W received the most capital inflow, with a net purchase of HKD 9.504 billion in the past month, followed by significant inflows into Semiconductor Manufacturing International Corporation, Tencent Holdings, and Lenovo Group.

Southbound funds will continue to be an important driving force for the rise of Hong Kong stocks. First, the difference in funding costs between domestic and foreign capital provides a basis for the inflow of southbound funds. Domestic interest rates remain at a relatively low level, while the United States maintains high interest rates, resulting in a high yield spread between Hong Kong stocks and bonds anchored by Chinese bonds, while the yield spread anchored by U.S. bonds is relatively low. Therefore, the willingness of domestic capital to flow into Hong Kong stocks is evidently stronger than that of foreign capital. Second, considering that the U.S. is likely to slow down its interest rate cuts this year, it is expected that this phenomenon will continue for a long time. On January 29, the Federal Reserve FOMC meeting announced that the benchmark interest rate would remain unchanged at 4.25-4.5%, in line with market expectations The statement from this interest rate meeting has changed: regarding inflation, the phrase "progress towards the Committee's 2% target" has been removed; regarding employment, the unemployment rate has shifted from "still at a low level" to "stabilized at a low level in recent months," indicating a solid labor market. Overall, it is expected that the Federal Reserve will adopt a more cautious rate-cutting path in the future. In general, under the current context of interest rate divergence between China and the U.S., foreign capital allocation willingness is not as strong as southbound investment, making southbound funds the most important incremental capital source for Hong Kong stocks.

6. In the short term, is the current rebound of Hong Kong stocks nearing its peak?

This round of rebound has entered the mid-stage, and in the latter half, the focus of funds may gradually shift from technology stocks to value stocks. First, the AI industry catalysis is the main driving force. As mentioned earlier, this round of Hong Kong stocks has started to rebound against a backdrop of significant external macro uncertainty, primarily driven by the AI industry catalysis, leading to strong preferences for Hong Kong tech stocks from both domestic and foreign capital, with a large influx of funds. However, as the favorable factors for the industry fade, market sentiment will gradually cool down, and market trading volume is likely to decline. Second, recent U.S. CPI and employment data have been released, and domestic economic and financial data exceeding expectations have shifted the investment focus. With the Two Sessions policy approaching, the logic of the Hong Kong stock value sector is beginning to emerge, and currently, the trading activity of Hong Kong tech stocks is already quite high, suggesting that the focus of funds may shift from tech stocks to value stocks. This can be seen from the relative advantage of the Hang Seng Technology/Hang Seng Index. Once the value sector's catch-up ends, the current rebound of Hong Kong stocks will likely reach its peak.

7. If the Hong Kong stock market peaks in the short term, which sectors will be relatively resilient?

We believe that the dividend sector and leading internet companies can demonstrate better defensiveness in the event of a short-term peak in the Hong Kong stock market. First, the dividend sector, as the current low domestic interest rate environment is expected to last for a long time, leading to relatively high yields in the Hong Kong stock market anchored by Chinese government bonds. Second, leading internet companies, even excluding AI, have significantly improved their original businesses. Considering that signs of economic recovery are just beginning to emerge, the overall profit improvement in the Hong Kong stock market will not be particularly fast, and given the high degree of institutionalization in the Hong Kong stock market, there is a greater emphasis on performance. As the annual report season approaches, if the Hong Kong stock market peaks in the short term, the dividend sector and internet leaders with strong performance advantages will be relatively resilient.

8. In the long term, has a bull market in the Hong Kong stock market been established?

The long-term bull market in the Hong Kong stock market was established in the fourth quarter of last year, and we are currently in the continuation of this bull market. Over the course of the year, the transition from bear to bull since the fourth quarter of 2024 continues, with the central tendency moving upward. The three long-term cycles of the Hong Kong stock market are currently in a state of bottom recovery, indicating that the bull market will persist.

1. Liquidity cycle: Global easing policies are still ongoing. Since mid-2023, the seven major central banks around the world have successively entered a rate-cutting phase, and the current rate-cutting cycle is approximately at its midpoint, with overall adjustments remaining loose for the next 1-2 years. Currently, the Federal Reserve may slow down the pace of rate cuts due to strong economic data, but the direction of interest rate policy adjustments will not reverse; Europe continues its pace of rate cuts. Meanwhile, with domestic interest rates hitting new lows, there is still a large amount of capital allocated to the Hong Kong Stock Connect dividend.

2. Valuation cycle: Risk premium recovery and safety margin support do not pose significant pressure. After experiencing a three-year bear market, valuations in the Hong Kong stock market are extremely cheap and are still at historically low levels. Even after six months of continuous recovery, the major broad-based indices remain significantly low in percentiles: most indices' PE or PB percentiles are still around 30%. The overall Hang Seng Index's PE and PB ten-year percentiles are at 30% and 20%, respectively.

3. Profit cycle: Currently in the recovery phase from the bottom. The profit cycle of the Hong Kong stock market is greatly influenced by domestic fundamentals. Currently, China is still in a state of policy implementation, but economic improvement is relatively weak, with no obvious signs of recovery. However, as policies continue to be implemented, the overall profit cycle shows some recovery, indicating that the Hong Kong stock market still has considerable upside potential.


Author of this article: Chen Guo SAC Certification Number: S1440521120006, He Sheng SAC Number: S144052209000, Source: CITIC Construction Investment Securities Research, Original Title: "CITIC Construction Investment: The Seven Most Critical Issues for Hong Kong Stocks Currently"

Risk Warning and Disclaimer

The market has risks, and investment requires caution. 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 are suitable for their specific circumstances. Investing based on this is at one's own risk