Soochow Securities Co., Ltd.: Can the "air refueling" of Hong Kong stocks be sustained?

According to the Zhitong Finance APP, Soochow Securities released a research report stating that the broad funding prices in the Hong Kong market, such as municipal bond yields (junk bond yields), have been continuously declining this year, consistent with the downward trend of U.S. Treasury yields. In the future, if the Federal Reserve resumes interest rate cuts, interbank rates in Hong Kong will decline, the risk-free rate of Hong Kong stocks will drop, and Hong Kong stocks will rise.

The main points from Soochow Securities are as follows:

After reaching the high point in October last year, Hong Kong stocks did not adjust but continued to rise, breaking through the experience of the past three years. Can this "in-flight refueling" be sustained? What catalysts can drive further increases in the future?

Rising brings greater rises. A large number of investors, based on past experience, either take profits or open large short positions when the Hang Seng Index reaches previous highs. Once the market continues to rise, hedge fund shorts may be forced to cover, and profit-taking investors may also be compelled to buy back, driving further increases.

U.S. market downturn. The vast majority of global investors continue to be optimistic about U.S. stocks (the performance of the U.S. stock bull market over the past decade has eliminated all shorts); on the other hand, they are concerned about short-term fluctuations and declines in U.S. stocks. Some global investors have previously shifted their U.S. stock investment positions to other markets, including Hong Kong stocks. However, they are still observing the earnings report period starting in April. Historically, strong performances from U.S. companies have led to good performances in the U.S. stock market during each earnings season. If the April earnings season performs poorly, or after the earnings disclosure period, many investors may "sell in May and go away." The funds leaving the U.S. stock market may increase their positions in Hong Kong stocks, leading to a rise.

Benchmark interest rates decline. Affected by the Federal Reserve's pause in interest rate cuts, interbank lending rates in the Hong Kong market remain high. However, the bank has observed that broad funding prices in the Hong Kong market, such as municipal bond yields (junk bond yields), have been continuously declining this year, consistent with the downward trend of U.S. Treasury yields. In the future, if the Federal Reserve resumes interest rate cuts, interbank rates in Hong Kong will decline, the risk-free rate of Hong Kong stocks will drop, and Hong Kong stocks will rise.

Overseas capital inflow. So far, nearly half of the net inflow of funds into the Hang Seng Technology Index has come from southbound funds. Overseas capital has not yet fully exerted its strength. In the future, if more data shows that China's macro economy bottoms out in the real estate cycle in the second and third quarters of 2025, escaping deflation. Once the CPI approaches 2% and the PPI turns positive, showing clear signals that corporate profits in 2025 exceed those in 2024. Then a large amount of overseas capital will flow significantly into the Chinese market, not just limited to the technology sector, bringing a comprehensive rise in Hong Kong stocks.

Historical experience shows that during the process of overseas capital flowing into Chinese assets, Hong Kong stocks perform ahead of Stock Connect and outperform A-shares.

Risk Warning:

1. Economic recovery may be less than expected: Economic recovery falling short of expectations may exacerbate market uncertainty;

2. The pace of Federal Reserve interest rate cuts may be slower than expected: This could negatively impact the liquidity of A-shares;

3. Geopolitical "black swan" events: Affecting foreign capital flows