Hong Kong stocks rose, U.S. stocks fell, and excess returns exceeded 10%, which has only occurred 6 times since 2012

Abstract

Historically, the situation where Hong Kong stocks strengthen while U.S. stocks adjust is rare—if we filter for rolling four-week periods where Hong Kong stocks rise, U.S. stocks fall, and excess returns exceed 10%, it has only occurred 6 times since 2012:

1. April 2015: The Chinese asset bull market entered an accelerated sprint phase, during which U.S. stocks made minor adjustments. The ultimate reason for the reversal was a tightening of liquidity that triggered a valuation bubble burst.

2. The next three occurrences all happened in 2022: in January, June, and December. These market movements had similar triggering mechanisms—turning points in the relative economic conditions of China and the U.S., specifically a shift in domestic policy expectations combined with U.S. stagflation trading, which induced a global "high-low switch" in capital.

3. The fifth independent market for Hong Kong stocks appeared in April-May 2024: The reasons were similar to those in 2022, involving a reversal of domestic policy expectations and U.S. stagflation trading.

4. The sixth Hong Kong stock market movement is the current one: Similar to previous instances, it features "quasi-stagflation" trading characteristics overseas, with weakening U.S. economic data; although inflation data has not yet clearly risen, the fluctuating tariffs have invisibly raised inflation expectations.

Reassessment space: Current position and short-term breakthrough constraints—Based on past experiences, the end of independent Hong Kong stock market movements can occur in two scenarios: the first is when the factors driving fundamental recovery are falsified; the second is when, after the latter half of the industrial bull market, there is no incremental information on fundamentals, and after liquidity-driven valuation increases, a sudden tightening of liquidity leads to a valuation bubble burst. Currently:

1. Valuation: Currently relatively reasonable, further valuation increases require profit support. The valuation of the Hang Seng Index, which has a high proportion of broad-based Chinese enterprises and financial stocks, has reached a vertical high; however, the main driver of this round of increases, the Hang Seng Technology Index, still has a low valuation percentile due to profit upgrades over the past year.

2. Profit: The internet sector has been the first to recover and slightly raise its base, while the cyclical recovery remains to be validated. The fundamentals of the Hang Seng Technology Index have bottomed out ahead of the Hang Seng Index, mainly supported by the reversal of the internet platform's difficulties, but attention should be paid to marginal changes after the base is raised. Whether Hong Kong stocks can usher in a cyclical main uptrend still hinges on whether the real estate cycle can stabilize in the short term.

3. Liquidity: In the past week, there has been continued inflow of southbound capital into technology growth. In terms of existing stock, the current proportion of southbound capital and the holdings of mainland public funds within it are not high. We estimate that by the end of 2024, mainland public funds will account for 14.8% of southbound capital holdings, while mainland public fund holdings account for only 1.5% of the circulating market value of Hong Kong stocks. However, in the short term, it is still necessary to be appropriately cautious about the risks of overbuying and overheating.

Risk Warning: Technological progress at the industrial level may fall short of expectations; deterioration of the overseas economic situation and negative impacts from U.S. stock adjustments; changes in the international political environment (China-U.S. friction, geopolitical issues, etc.) may bring additional shocks; domestic economic growth and stability policies may not meet expectations (exports exceeding expectations may be dragged down by overseas demand, and consumer confidence in real estate may be difficult to restore, etc.).

Report Body

1. Historical Independent Market of Hong Kong Stocks Relative to U.S. Stocks

In the past week, the Hong Kong stock market maintained its strength despite poor performance in the US stock market. Especially on Thursday night, the US stock market plummeted under pressure from tariffs and weak economic data, while on Friday, the main indices in Hong Kong opened lower but once turned strong and positive. Ultimately, the Hang Seng Index and Hang Seng TECH Index rose by 5.62% and 8.43% respectively on a weekly basis, with the increase only second to the first week of February.

The divergence in performance between the Hong Kong and US stock markets this week also reflects a microcosm of the past period (Table 1). Since February, the Hang Seng Index and Hang Seng TECH Index have surged by 27.8% and 19.8%, while the S&P 500 and Nasdaq have declined by 4.5% and 7.3% during the same period. We attempted to review the scenarios since 2012 where the Hong Kong stock market strengthened while the US stock market adjusted, and found that there are not many comparable cases—if we filter for rolling four-week periods where the Hong Kong stock market rose, the US stock market fell, and the excess return exceeded 10%, this has only occurred 6 times since 2012 (Figure 1):

(1) The first occurrence was in April 2015: The Chinese asset bull market entered an accelerated sprint phase, during which the US stock market made minor adjustments. The eventual reversal was due to strengthened financial regulation and restricted leverage, leading to a contraction in liquidity that triggered a valuation bubble burst.

(2) The next three occurrences all happened in 2022, specifically in January (very briefly), June, and December (Figure 2). These market movements had similar triggering mechanisms—turning points in the relative economic conditions of China and the US. Due to special reasons, domestic macro expectations were relatively low in 2022, while the US economy performed steadily overall but experienced phase-specific stagflation trading. For instance, at the end of 2021 to the beginning of 2022, the second quarter of 2022, and the end of 2022 to the beginning of 2023—data showed a significant decline in US GDP and some sub-items (the annualized rate of GDP in 2022 once turned negative), while core CPI rebounded or exceeded expected levels. If domestic policy expectations change alongside US stagflation trading, it could trigger a global "high-low switch" in capital.

(3) The fifth independent market for Hong Kong stocks appeared in April-May 2024 (Figure 2), with reasons similar to those in 2022, driven by changes in domestic policy expectations (real estate incremental policies) and US stagflation trading (data at the end of April 2024 intensified concerns).

(4) The sixth Hong Kong stock market rally is the current one. Similar to previous instances, it features "stagflation-like" trading characteristics overseas, with weakening US economic data and a retreat from the "American exceptionalism" narrative. On March 3, the Atlanta Federal Reserve's GDPNow model predicted a -2.8% growth rate for real GDP in the first quarter of 2025, primarily dragged down by private consumption and net exports. Meanwhile, although US inflation data has not yet clearly risen, the fluctuating tariffs have invisibly raised inflation expectations.

What differs from previous instances is the driving factors of the Chinese market's fundamentals. The driving forces behind the independent market rallies in 2022 and 2024 both stemmed from changes in macro policy expectations, trading on "bottom-line logic," and the eventual end of these rallies was accompanied by a further downward adjustment of macro expectations (core indicators include a decline in the growth rate of medium- and long-term loans, and real estate prosperity falling beyond expectations). The current rally is driven by bottom-up technological advancements at the industrial and enterprise levels, thereby triggering a "revaluation logic" for Chinese assets (Table 2, Figure 3) From past experiences in several rounds, there are two scenarios for the end of the independent market in Hong Kong stocks. The first is when the factors driving the fundamental recovery are falsified (as seen in several independent markets in 2022, where the peak ultimately resulted from the actual economic conditions failing to materialize); the second is when, after the latter half of an industrial bull market, there is no incremental information on the fundamentals, and after funds drive up valuations, a sudden tightening of liquidity leads to the bursting of the valuation bubble.

II. Re-evaluation Space: Current Position and Short-term Breakthrough Constraints

Therefore, to judge the direction of this round of market, the key lies in two questions: First, will the fundamental drivers from the industrial level be falsified; second, from the current valuation and funding perspective, how much re-evaluation space is there.

(1) Valuation: Currently relatively reasonable, further valuation increases require profit support

From the valuation perspective, we look at the current position from three intervals (Table 3): since 2020 (due to special reasons and the peak of the Chinese real estate cycle), since 2018 (due to Sino-US trade friction and the topic of de-globalization), and over the past 10 years (the peak and collapse of growth stock valuation bubbles). Overall, the current broad-based indices of Hong Kong stocks show significant differentiation, with the Hang Seng Index and H Share 50 Index, which have a high proportion of state-owned enterprises and financial stocks, already reaching high valuations after this round of increase; however, the main force of this round of increase, the Hang Seng Technology Index, still has a relatively low current valuation percentile due to profit upgrades over the past year.

In terms of valuation rationality, the valuation level of Hong Kong stocks is relatively reasonable compared to the global context. It should also be noted that the main factor limiting the upward movement of the valuation center of Chinese assets remains the profit level. East Asian economies dominated by manufacturing + the German market face similar issues, namely low profits matching low valuations. In other words, regardless of what drives this so-called re-evaluation bull market, to achieve a systematic upward shift in valuations and price centers in the medium to long term, it ultimately needs to be supported by actual profits.

(2) Profitability: The internet sector is the first to recover and slightly raise the baseline, with cyclical trends yet to be verified

Due to the lack of mandatory disclosure of quarterly reports for Hong Kong stocks, the overall financial report situation is based on the mid-year report of 2024. Overall, the fastest decline in Hong Kong stock performance occurred between 2021 and 2023, and the year-on-year readings of the most recent two semi-annual reports are no longer declining. The year-on-year net profit for 2024H1 under three metrics is 5.4%, 1.8%, and 18.0%, respectively.

Looking ahead, the fundamentals of Hong Kong stocks mainly focus on:

(1) The fundamentals of the Hang Seng Technology Index have bottomed out ahead of the Hang Seng Index, and market performance is better than other styles, primarily supported by the reversal of difficulties in internet platforms, but attention should be paid to marginal changes after the baseline is raised. According to the primary industry categories of the Hang Seng Index, the recovery of revenue in the industrial sector (including automobiles) and information technology is relatively clear. In terms of net profit, benefiting from the low baseline of the same period last year, the profit of the information technology sector in 2024H1 is nearly double that of the same period last year.

(2) Whether Hong Kong stocks can usher in a cyclical main uptrend still hinges on whether the real estate cycle can stabilize at this stage. Data shows that the financial reports of Hong Kong stocks after 2021 have been greatly dragged down by the real estate chain (the profit contribution of the real estate and construction industry reached 21.6% and 36.1% at peak stages under both all Hong Kong stocks and only Hong Kong-listed metrics, but turned into negative contributions after 2021). A positive sign is that in the past few months, under the continuous output of policies, the property market has shown signs of volume increase and price stability. The concern is that there are currently no significant triggering conditions on the demand side.

(3) Capital situation: In the past week, southbound funds continued to flow into technology growth

In last week's report "Southbound Trading Hits Historical Highs, What Are the Structural Characteristics?" we summarized the allocation of southbound funds as of the end of February. In the technology sub-sectors, holdings in hardware devices, semiconductors, and discretionary consumer retail within technology growth are at a near three-year high; the software services and telecommunications services, which are the main forces in this round of increase, are not considered crowded from an overweight perspective.

In the past week, southbound data shows that funds continue to flow into the growth end of the barbell and reduce allocation in dividend sectors. From a medium to long-term perspective, there is still considerable potential incremental capital for Hong Kong stocks—currently, the proportion of southbound funds and the holdings of mainland public funds within them is not high. We estimate that by the end of 2024, the holdings of mainland public funds in southbound funds will be 14.8%, and the holdings of mainland public funds in the market capitalization of Hong Kong stocks will only be 1.5% However, in the short term, it is still necessary to be appropriately vigilant about the risks of overbought and overheating.

Article authors: Liu Chenming, Xu Xiangzhen, source: Deep Thinking of Chenming's Strategy, original title: "【GF Strategy Liu Chenming & Xu Xiangzhen】The Independent Market of Hong Kong Stocks Relative to US Stocks in the Past 15 Years"

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 conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk