CICC: How far has the revaluation of Chinese assets progressed?

In the past week, the Hong Kong stock market experienced significant fluctuations. At the beginning of the week, the Hang Seng Index briefly approached the optimistic scenario of 25,000 points that we provided, only to retract sharply again. The Hang Seng TECH Index fell more than 3% for two consecutive trading days on Thursday and Friday. Overall, the Hang Seng TECH Index dropped 4.1% last week, while the Hang Seng Index, Hang Seng China Enterprises Index, and MSCI China Index fell by 1.1%, 1.5%, and 1.7%, respectively, marking two consecutive weeks of decline. In terms of sectors, telecommunications services (-10.4%) and real estate (-7.5%) led the decline, while utilities (+2.1%) and energy (+0.9%) rose against the trend.

Chart: Last week, the MSCI China Index fell 1.7%, with telecommunications services and real estate leading the decline, while utilities and energy rose against the trend Source: FactSet, CICC Research Department

Recently, such drastic ups and downs in the Hong Kong stock market are not a first occurrence. Since the end of February, although the market has repeatedly surged due to short-term sentiment and capital inflows, it has never been able to "effectively break through" the levels we provided earlier. On February 16 and February 24, we released two special reports titled "Revaluation of Chinese Assets?" and "Revisiting the Prospects of Chinese Asset Revaluation," estimating the central range of the Hang Seng Index at 23,000-24,000 points, with an optimistic scenario of 25,000 points. We suggested observing around this range without chasing highs, and if not choosing to take profits, to moderately adjust positions towards dividends.

Looking back, this viewpoint has proven effective. In fact, despite the active market giving a sense of sustained heat, if investors had chosen to increase their positions in leading stocks or the Hang Seng Index and Hang Seng TECH Index since the end of February, they would likely have been flat or even at a loss over the past month. So, where does the revaluation of Chinese assets stand now? What is the direction moving forward, and how should one allocate? What key points need to be closely monitored?

1. Where is the revaluation now? A narrative-driven extreme "structural market," with current valuations relatively reasonable

If we count from after the Spring Festival holiday (February 3), the Hang Seng Index and Hang Seng TECH Index have risen by 17.1% and 19.4%, respectively, significantly outperforming A-shares (the Shanghai Composite Index and ChiNext rose 3.5% and 4.3% during the same period). It seems that Hong Kong stocks have experienced a wave of index-level performance, but in reality, it is a relatively extreme "structural market." Compared to last year's broad-based rebound driven by macroeconomic policies on "September 24," this round of increase is narrower, concentrated in a few leading AI technology stocks. Since the Spring Festival, among the 425 stocks under the Hong Kong Stock Connect, only 118 stocks have outperformed the index (accounting for 27.8%), and among the 83 constituent stocks of the Hang Seng Index, only 22 have outperformed (accounting for 26.5%)This further explains several phenomena and results: 1) The overall index of Hong Kong stocks surged because of the large proportion of leading companies. If measured by "technology content," there are 17 stocks that overlap between the Hang Seng Index and the Hang Seng TECH Index (accounting for 20.5%), with a weight close to 40%, while the remaining 60% is mostly traditional old economy sectors. 2) Hong Kong stocks are stronger than A-shares because these leading stocks are not present in A-shares, and the AI structure leading A-shares contributes too little to the index. If we look at the A-share artificial intelligence sector (884201.WI) alone, it has also performed well since the Spring Festival (+14.7%), but these stocks only account for 2.3% of the Shanghai Composite Index. 3) Passive products are thriving, and active investors are likely to underperform; sufficient focus is necessary. In recent communications with institutions, some clients reported facing redemption pressure during the surge, while funds flowing into Hong Kong stock ETFs quickly rose and set a new monthly net inflow record.

Chart: Since March, funds flowing into Hong Kong stock ETFs have rapidly increased and set a new monthly net inflow record Source: Wind, CICC Research Department

What position has the current market been revalued to? In our report "Can Hong Kong Stocks Still Be Bought?" published on March 10, we made comparisons from multiple dimensions. First, on the emotional level, the recent gains in the Hang Seng Index and Hang Seng TECH Index are mainly contributed by the decline in risk premium (ERP). The current risk premium of the Hang Seng Index is 6.0%, which is close to the emotions corresponding to last year's "924" and the early 2023 peak, corresponding to the current Hang Seng Index level of 23,000-24,000 points (applying the historical market peak emotions to the current risk-free interest rate and profit expectation environment). If we further assume that the technology sector with 40% "technology content" drops to the emotional level corresponding to the historical peak of the Hang Seng TECH Index in 2021, while the other 60% non-technology part remains at the current level, it could push the Hang Seng Index to 25,000 points.

Chart: The recent gains in the Hang Seng Index and Hang Seng TECH Index are mainly contributed by the decline in risk premium (ERP) Source: Bloomberg, CICC Research DepartmentChart: The current Hang Seng Index risk premium is basically on par with last year's "924" market and the market peak during the optimization of epidemic prevention measures at the beginning of 2023 Source: Bloomberg, CICC Research Department

Chart: Assuming optimistic sentiment in the technology sector returns to the 2023 peak, corresponding to 24,000 points; returning to the 2021 peak, corresponding to 25,000 points Source: FactSet, Bloomberg, CICC Research Department

Secondly, on the valuation level,

1) For the 40% "including technology" portion, after the recent surge in Hong Kong stocks and the decline in U.S. stocks, the absolute valuation gap between the two has significantly narrowed. For example, Hang Seng Technology 18x dynamic P/E vs. Nasdaq 100 24x dynamic P/E, Tencent 18x dynamic P/E vs. Meta 22x dynamic P/E. If dynamically matching profitability, the valuation is basically reasonable. For instance, the market capitalization of leading Chinese technology companies accounts for 28.9% of all Hong Kong stocks, higher than the U.S. at 26.6%, but the net profit share of leading Chinese technology companies is 13.3%, lower than the U.S. at 15.7%; additionally, the ROE and profit margins of leading U.S. technology companies are generally higher than those of leading Chinese technology companies. If we assume that the overall dynamic PE of U.S. technology stocks (24.1x) matches the net profit margin (28.4%), then the overall dynamic PE of Chinese technology stocks (17.6x) and net profit margin (13.2%) may also match or be slightly overvalued.

2) For the 60% "excluding technology" portion, the relative advantage over A-shares is 5%. In the absence of significant fiscal stimulus, this portion relies more on macro policies and overall economic leverage recovery, and can only be valued with a dividend mindset, which is more aligned with the AH premium perspective (the AH premium is not a good perspective to depict the overall difference between A-shares and Hong Kong stocks, as it only covers 145 AH listed companies, most of which are state-owned enterprises and old economy). In this round of market, although this portion is not the main line, the AH premium has still fallen from 145% in early February to the current 131%, also benefiting from the rising tide of ETF inflowsHowever, considering that individual and public investors in the Hong Kong Stock Connect need to pay dividend tax (20% for H shares, up to 28% for red-chip stocks), it means that when the AH premium converges to 125% (1/0.8), these investors will not see any difference in buying dividend assets between A shares and Hong Kong stocks.

Chart: After the recent surge in Hong Kong stocks and the significant drop in U.S. stocks, the absolute valuation gap between the two has clearly narrowed Source: Bloomberg, China International Capital Corporation Research Department

Chart: The net profit share of leading Chinese technology companies is only 13.3%, lower than the 15.7% in the U.S. Source: FactSet, China International Capital Corporation Research Department

Chart: However, the market capitalization of leading Chinese technology companies accounts for 28.9% of the Hong Kong stock market, which is higher than the 26.6% in the U.S. Source: FactSet, China International Capital Corporation Research Department

Chart: The dynamic P/E of Chinese technology stocks is lower than that of U.S. technology stocks, but the market consensus also expects lower profit margins compared to the U.S. Source: FactSet, China International Capital Corporation Research Department

Chart: The AH premium has converged to 130.6, leaving only about 5% relative space for A shares in the short term![](https://mmbiz-qpic.wscn.net/sz_mmbiz_png/fzHRVN3sYs9O1TtNSkTsibmCSk7IFyw5upubs91ugWjpia4TPu24wuFsGlq6SQfVw7AuqWX9slR8J7whuCXwhyMA/640?Data source: Wind, CICC Research Department

II. Can the market expand? 40% of technology remains the main line, and the expansion to the remaining 60% requires strong policy support as a prerequisite.

The essence of this round of market is the re-evaluation of the technology sector by DeepSeek "breaking the circle," which determines that the 40% "technology-inclusive" part of the Hang Seng Index remains the medium to long-term main line. However, once sentiment is fully accounted for and valuations are restored to reasonable levels, the market focus will naturally shift to future profit potential, leading to greater market divergence, and further upward movement will require stronger catalysts (similar to Alibaba's capital expenditure exceeding expectations a month ago). A recent interesting phenomenon is that as the earnings season begins, many leading companies such as Tencent, Xiaomi, and XPeng have seen their stock prices drop despite exceeding earnings expectations, indicating that some funds are taking the opportunity to lock in profits. Additionally, Tencent's capital expenditure did not significantly exceed expectations, directly leading to a sharp decline in IDC leaders like GDS Holdings and Century Internet after their earnings announcements. The current "first phase" recovery driven by sentiment and expectations has basically been completed. If future profit potential opens up, a situation similar to Nvidia's "the more it rises, the lower the valuation" could occur, but this is also where market divergence is greatest.

Even so, the 40% technology-inclusive part remains the main line, but this part alone is insufficient to solve all economic issues corresponding to the remaining 60%. Therefore, for the market to expand, strong macroeconomic policies are still a prerequisite. In this round of market led by the technology sector, another issue of market concern is whether the market can expand to the remaining 60%, such as general consumption and even cyclical goods. Last Friday (March 14), under the catalysis of fertility subsidies and other consumption policies, traditional consumer leaders such as liquor, food and beverage, and textiles and apparel surged, which filled many investors with expectations.

However, we believe that the probability of this round of market significantly expanding to other sectors outside of technology is relatively low, unless 1) technology changes and resolves the overall macro deleveraging and contraction issues, leading to a significant recovery in total factor productivity; or 2) macroeconomic policies are further strengthened, especially through substantial fiscal stimulus and monetary easing.

The first point is not realistic in the short term; distant water cannot quench immediate thirst. As for the second point, whether the current activity in the capital market and real estate might lead to policies being "not in a hurry" to strengthen in the short term needs to be observed. At least the central bank's recent operations in monetary policy reflect this (whether it is stopping bond purchases or maintaining tight funding rates), and the year-on-year change in the broad fiscal deficit from November to December last year also slowed down. The logic behind this is that any policy has "constraints" and "costs," which means that policies are likely to be strengthened in more urgent situations. Therefore, the policy statements in the next month or two (such as the first quarter Politburo meeting) and the high-frequency pace of fiscal spending (leading the economy by about a quarter) will be crucial for judging whether the market can expand and even the overall trend.

Chart: Real estate demand has intermittently recovered under policy easing, but sustainability remains to be observed![](https://mmbiz-qpic.wscn.net/sz_mmbiz_png/fzHRVN3sYs9O1TtNSkTsibmCSk7IFyw5uAN3STQY49YbRef10exZsqSdszwI6XvPvS13VX8z4H20VAKIMuDYpPg/640?Data source: Wind, CICC Research Department

Chart: However, the fiscal pulse will slow down again in November and December 2024 Data source: Wind, CICC Research Department

III. What are the thoughts of various funds? Southbound is the main force that is easily overdrawn recently, and foreign capital's short-term incremental supply is insufficient.

In terms of liquidity, the overall Hong Kong stock market is relatively small and more concentrated on leading stocks, which makes the effect of a small amount of funds on the index stronger. Of course, this also makes it difficult to provide precise points, as short-term capital games can often lead to fluctuations of 5-10 points within a few days, or even reach new highs. However, one thing is certain: when expected valuations are fully accounted for and before new catalysts emerge, the divergence among different funds will definitely increase, directly leading to the fluctuations seen in the past month.

The main funds in this round of Hong Kong stocks: 1) Initially, it was overseas hedge funds and Chinese background funds that mainly invested in US stocks in recent years; these funds act quickly and are most likely to switch from US stocks; 2) Recently, especially since March, southbound has become the main force, or even the absolute main force, evidenced by the significant acceleration of southbound inflows, although there was a brief outflow in February.

Regarding overseas funds, EPFR shows a slight inflow of foreign capital, but the scale is significantly smaller than "924", mainly consisting of passive and trading funds, with long-term funds primarily rotating within Asia-Pacific and emerging markets. Passive overseas funds have continued to flow into the Chinese stock market during this period, with inflows for 11 consecutive weeks, but the magnitude is much smaller compared to last year's "924" market. Active funds (mainly long-only) continue to flow out of the Chinese market, with inflows into Asia-Pacific and emerging markets, but these funds are currently already at standard allocation or even slightly overweight, showing insufficient willingness to increase positions in the short term. In contrast, larger European and American funds have not shown significant inflows, let alone dominance. This portion of funds is influenced by factors including geopolitics, and the likelihood of a significant short-term inflow is low, focusing more on the overall macro situation and the realization of profits in the technology industry, rather than just expectations ("Is capital 'rising in the East and falling in the West'?").

Chart: Passive funds continue to flow into Chinese stocks, while active funds continue to flow out; southbound inflows slowed down this week Data source: Wind, EPFR, CICC Research DepartmentIn terms of southbound capital, it has become the main force since March. Recently, the inflow of southbound capital has significantly accelerated, far exceeding last year's "924," with an average daily inflow speed since the beginning of the year being more than twice that of last year (HKD 807.9 billion for the whole year of 2024, averaging HKD 3.47 billion per day). If the current speed is maintained, the total for this year could approach HKD 2 trillion, but the possibility is limited. In our report published last week, "How Much Space is Left for Southbound Inflows?", we conducted a detailed calculation, indicating that the "bullets" of public offerings and insurance institutions may not be as plentiful as imagined, while the sentiment and trend-driven nature of individual and speculative funds, which are harder to measure, are very strong, as has been seen multiple times in history.

Although in recent years, as southbound capital has continuously increased in trading volume and holdings, its pricing power has also been rising, there is no "absolute pricing power" in the face of short selling with borrowed shares and the unlimited supply of "flash placements" (which southbound cannot participate in). Recently, the number of placements in Hong Kong stocks has significantly increased; by mid-March, the total amount of placements had reached HKD 47.6 billion, exceeding half of the peak of HKD 86 billion in January 2021. As the market cools down, southbound capital has also shown a clear weakening, with an inflow of HKD 23.02 billion last week, significantly lower than the HKD 61.61 billion of the previous week.

Chart: Since March, the total amount of placements in Hong Kong stocks has reached HKD 47.6 billion, exceeding half of the peak of HKD 86 billion in January 2021 Data source: Wind, CICC Research Department

IV. What’s the outlook? Actively intervene during downturns, take moderate profits during exuberance; focus on dividends in the short term, with technology remaining the main line.

Overall, we maintain the index at Hang Seng Index 23,000-24,000, optimistic at 25,000, with the structural 40% "technology-inclusive" part still being the main line of judgment. We previously indicated that chasing at this position is not cost-effective. If one is unwilling to reduce positions, they can moderately adjust their positions towards dividend styles, but technology remains the main line, and one can switch back after suitable positions and catalysts to achieve volatility hedging.

For investors, the most important factors are cost and position. Since assumptions and expectations about the future vary, it is merely a matter of using different costs to gamble on the expectations one believes in. If the holding cost is very low, short-term fluctuations are completely negligible and can be endured, but if the cost has just been added in the past month, it can become quite awkward. The same applies to positions.

However, since the beginning of 2024, the positive changes in the Hong Kong stock market are: 1) there is a bottom support, reflected in the continuously rising bottom, such as the rebound at the beginning of 2024, the rebound from the relaxation of real estate policies during the May Day holiday in 2024, the "924" market, and the current technology market, indicating that the policies are effective;2) There is a main line, reflected in the technology market. Before this round of DeepSeek, various industries rotated in turn, and apart from the risk-averse dividends, it was almost impossible to gather a consensus on capital. This is completely different from the trend from 2021 to 2023, which had neither a bottom support nor a main line.

If we compare the Hong Kong stock market to a stage, the stage before 2021-2023 was unstable and often "sunk," and there was no "protagonist" on stage; since 2024, the foundation of the stage has become more solid, the market bottom has been continuously raised, and more importantly, there is now a "protagonist." Therefore, on a relatively solid stage, focusing more on the structure as the protagonist is a better strategy. However, the market occasionally expects the stage to rise overall, which can be a bit overly excited. Thus, in response to this continuously rising bottom, but with expectations that can easily become overly excited, the best strategy is what we have always suggested: actively intervene during downturns and take moderate profits during exuberance; if unwilling to reduce positions, one can choose to balance styles, for example, switching from technology to dividends first, and then switching back after suitable adjustments.

Chart: The market trends over the past decade reflect that any policy comes at a cost, but since the end of 2023, the bottom of the Hong Kong stock market has been continuously rising and has support Source: Wind, CICC Research Department

Author of this article: Liu Gang, Zhang Weihuan, et al., Source: CICC Insight, Original title: "CICC: To what extent has the revaluation of Chinese assets progressed?"

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