The increase in the Hong Kong stock market is largely attributed to the rise in valuations, and now we need to look at the annual reports
China National Investment Securities analysis pointed out that since the beginning of the year, the Hang Seng Index in the Hong Kong stock market has risen by 19.4%, with the price-to-earnings ratio increasing by 20.1%, but both actual EPS and ROE have declined. The market has raised its future earnings forecast by 4.13%, supporting the Hong Kong stock market to emerge from a bear market. If earnings recover, the market will welcome a larger upward trend; if earnings recovery fails, it may face market adjustments. If there are no earnings that exceed expectations during the annual report window, the valuation increase may cool down
Guotou Securities:
Taking the Hang Seng Index as an example, the index has risen 19.4% year-to-date, while the price-to-earnings ratio (TTM) has increased by 20.1% during the same period; actual EPS has decreased by 0.56% year-to-date, and actual ROE has decreased by 0.14% year-to-date.
The fluctuations in valuation imply trading on future economic trends. If actual EPS is replaced with forecast EPS, its explanatory power for the market will significantly improve. The correlation coefficient between forecast EPS and the Hang Seng Index is 0.72. Since the beginning of this year, the market has raised its earnings forecast for the next 12 months by 4.13%, which is about 10.82% higher compared to last year's low, and this is the main support for Hong Kong stocks to emerge from the bear market logic.
Typically, the trend of forecast EPS leads actual EPS, but there can be forecasting errors. When earnings forecasts hit a bottom, it often drives valuation recovery and improves market performance. There are two possible scenarios going forward:
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In the first scenario, if the earnings recovery is confirmed, as in Q1 2016, it will lead to a valuation rally—valuation fluctuates at high levels, with actual earnings driving the main upward wave of the market, and the upward trend will be larger, last longer, and have smaller pullbacks.
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In the second scenario, if the earnings recovery is falsified, as in Q4 2020 and Q4 2022, it will lead to a valuation rally followed by market peak adjustments and significant valuation cuts.
Returning to the current situation, it is clear that since mid-2024, the Hong Kong stock market has gradually climbed out of this round of earnings bottom. After the earnings forecast hit bottom in Q1 2024, it was validated by actual earnings data, making the Hong Kong stock market's performance begin to show aggressiveness starting in the second half of 2024. However, it should also be noted that the valuation increase since the beginning of the year has already sufficiently accounted for further earnings recovery expectations for the year. During the annual report window period, if there is no better-than-expected earnings performance, there is a risk of cooling off the valuation rally.
