Tianfeng Securities: Domestic capital moving south to seize the pricing power of Hong Kong stocks?

According to the Zhitong Finance APP, Tianfeng Securities released a research report stating that the core factor for investment in the consumer sector is valuation. With the current low valuation of the consumer sector, declining interest rates, and policy catalysis, the recovery cycle is on the rise (even if it is a very weak slope). Being overly pessimistic about consumption based on macro narratives poses a risk, and attention should be paid to the Hang Seng Internet. In terms of allocation, the equity risk premium (ERP) of the Hang Seng Index, measured by the 10-year China bond yield, is at a position that breaks down to the next standard deviation, comparable to early October 2024, and there is still some downward space compared to early February 2023. Therefore, Hong Kong stocks remain attractive to mainland investors. Under the long-end U.S. Treasury situation, the Hang Seng Index ERP has broken through the low levels of recent years. Although the 10-year U.S. Treasury yield has recently seen a rapid decline, the cost-effectiveness of U.S. Treasuries within the comparable range is still higher than that of Hong Kong stocks, and the willingness of foreign capital to allocate Hong Kong stocks still requires more observation.

The main points of Tianfeng Securities are as follows:

The trading sentiment in this round of Hong Kong stocks is not as strong as in the previous three rounds, mainly due to a noticeable narrowing of styles.

After more than a month of continuous upward movement in Hong Kong stocks, the market breadth of the Hang Seng Index (the proportion of constituent stocks with prices above the 20-day moving average) rose from a low of 22.9% to a high of 90.4% on March 7. However, the steepness and peak of this indicator in the current round of the market are not as pronounced as in the three previous rounds in November 2022, April 2024, and September 2024. A similar pattern is also reflected in the RSI indicator, indicating that the market's rise has not yet reached a state of comprehensive resonance.

The reason for this phenomenon is that the upward momentum of Hong Kong stocks is mainly concentrated in a few sectors. As of March 7, only two sectors, Information Technology (+34.7%) and Consumer Discretionary (+32.1%), have outperformed the Hang Seng Index (20.79%) this year. The rolling 10-day trading volume of the Hang Seng Technology Index once exceeded 40%, setting a historical high, while the participation of funds in other industries has been squeezed. This high dispersion (return variance) and high crowding state reflect signs of local overheating in Hong Kong stocks.

The implied internal correlation of the Hang Seng Index points to a return to a consistent pace among constituent stocks.

In the past three years, the implied correlation of the Hang Seng Index (1 month) has touched the bottom range at several points in time, such as July 28, 2022, February 2, 2023, May 16, 2023, and May 17, 2024, corresponding to the Hang Seng Index reaching a phase high. As of March 7, 2025, this indicator has risen to 0.39, having previously dropped to 0.33 on February 26. If we refer to recent patterns, the subsequent implied correlation may begin to rise, and the differentiation among constituent stocks will gradually converge. Apart from the previously large gains in technology and consumer discretionary sectors, the influence of other sectors on the Hang Seng Index is expected to increase, and in a sense, a "spreading market" has already begun.

If other sectors follow suit and catch up with technology in the future, it would represent investors' overall optimistic attitude towards Hong Kong stocks. The logic implied by this broad-based rally may be twofold: first, on the numerator side, the market's expectations for the profit outlook of Hong Kong stocks have improved. It can be seen that the forward EPS of the Hang Seng Index has been continuously revised upward this year, with quarter-on-quarter growth rates corresponding to an upward trend, and the China Economic Surprise Index shows signs of bottoming out and stabilizing; second, on the denominator side, global allocation funds are returning to China, believing in the process of China's economic reform and the revaluation of technological value In recent years, the performance of emerging market indices excluding China and developed market indices excluding the United States has not differed significantly, while the MSCI China-U.S. Index has shown considerable divergence, reflecting that international investors are more influenced by factors related to great power competition in their global allocations. With the stabilization of the domestic economy and the gradual emergence of the effects of technological innovation, foreign capital is expected to gradually return to the Chinese market.

Some Asia-Pacific funds are increasing their positions in China, while European and American funds remain cautious.

Foreign capital can be categorized into two types: Long Only (subjective bullish) and Hedge Funds. The former focuses on allocation strategies, while the latter is more involved in opportunistic trading. According to Bloomberg, hedge funds saw a significant inflow into Chinese equity assets in early February, marking the largest single-week inflow in four months, but they subsequently reduced their holdings for four consecutive weeks. This type of unstable fast money tends to create trading pulses in Hong Kong stocks, making it difficult to serve as a stabilizer.

As for subjective bullish funds, Bloomberg's analysis of the regional allocations of some large active equity funds in Asia-Pacific shows that in recent months, most funds have been reducing their exposure to Indian stocks and increasing their holdings in Chinese stocks. South Korean investors also purchased the most Hong Kong stocks in a single month in February in three years, holding an improved outlook for the Chinese market. In contrast, the cumulative net outflow of European and American actively managed Long Only funds continues to expand, with only a brief return in early 2023. These funds may need to observe broader macro support policies or signals of economic reversal before taking action.

The third phase of the "Match Point 2.0" initiative is underway, with a rebound in social financing pulses observed. After the Spring Festival, further observation of fundamental improvements is needed, with the Hang Seng Index leading and A-shares lagging.

Based on economic recovery and market liquidity, the investment mainline can be simplified into three directions:

1. Breakthroughs in Deepseek and leadership in technology AI+

2. Valuation repair of consumer stocks and gradual recovery of consumption stratification

3. The continued rise of undervalued dividends. Dividend pullbacks often occur when strong industrial trends emerge, so the height of undervalued dividends depends on the progress of the AI industry trend, which in turn relies on breakthroughs in AI applications and consumption. The core factor for investment in the consumer sector is valuation. Given the current low valuations in the consumer sector, declining interest rates, and the onset of a recovery cycle catalyzed by policies (even if the slope is very weak), being overly pessimistic about consumption based on macro narratives poses a risk, emphasizing the importance of the Hang Seng Internet sector.

Risk Warning: Rapid tightening of overseas liquidity; risk of a hard landing for the U.S. economy; complexities in international situations