Industrial Securities Zhang Yidong: The second half of the year for U.S. stocks is likely to be more bad than good, but it may not necessarily be negative for China

Key Points:

1. The turbulent period of international order reconstruction has arrived, and there may be three major opportunities for asset allocation.

• Learning from history, the asset allocation during the turbulent period of the international order in the 1970s. The deepening of great power competition in the 1970s, the collapse of the Bretton Woods system, the failure of the Vietnam War, and the oil crisis marked the entry of the international political and economic order into a turbulent and reconstructive period. The super bull market in gold emerged, the dollar fell into a decade-long depreciation cycle, and the US and European stock markets experienced a decade of stagflation in a "non-bull market" oscillation, while the Japanese stock market significantly outperformed US stocks.

• The current international order has once again entered a turbulent period, and uncertainty will be the norm. The "reciprocal tariffs" war initiated by the Trump administration essentially shifts the debt risks and social conflicts that are difficult to resolve internally outward. In the long term, the international order dominated by the US over the past 30 years is being dismantled by the US itself, and the dollar credit system will face deep-seated challenges.

• During the turbulent period of the international order, there are three major allocation opportunities to cope with "uncertainty." 1) Gold, military industry, digital assets, etc., are strategic assets during the turbulent period of the international order. 2) Opportunities related to technological innovation will be key to building a "inclusive" new global economic order. 3) Under the background of rebalancing country-specific asset allocation, there are opportunities for the revaluation of Chinese assets.

1. The US stock market may face difficulties in the second half of 2025, but it may not be negative for China.

• Outlook for the US economy in the second half of the year: The US economy may struggle to avoid a downturn in the second and third quarters of 2025. The US economy may have already entered a downward cycle by 2025. US inflation remains persistently high, and the "reciprocal tariffs" policy will further hinder the decline of inflation. The policies of the Trump administration are filled with strong uncertainties, which may still lead to twists and turns in global trade negotiations, ultimately affecting the confidence of US entrepreneurs and consumers.

• US Treasury bond yields may not decline significantly in the second half of the year. The Federal Reserve needs to make trade-offs between "controlling inflation" and "supporting economic growth," and its attitude towards interest rate cuts may be more cautious than the market's consensus expectations. Considering that inflation in the US remains persistently high in the second and third quarters, the 10-year Treasury yield may have limited downward space.

• US stocks may face a double whammy of valuation and earnings in the second half of the year, with global funds flowing to high-quality assets that are less correlated with US stocks. The risk premium of US stocks has not fully priced in the long-term uncertainties of US assets.

1. The Chinese capital market has great potential, with stable indices and structural bull markets.

• The international environment is "stable in the East and turbulent in the West," and the Chinese stock market will benefit from the new international order. Since 2025, the overseas political and economic situation has become increasingly turbulent, and China has become a stable anchor for global economic growth. China is coordinating domestic economic work and international economic and trade struggles, responding to the rapidly changing external environment with the certainty of high-quality development. The Chinese stock market and economic expectations form a positive feedback loop, and the confidence of domestic and foreign investors in the Chinese economy and stock market is steadily improving

• Key structural highlights of China's asset revaluation - Technology + New Consumption. 1) New Consumption - service consumption, spiritual consumption, AI consumption, etc. Chinese policies focus on the supply of service consumption and support the development of new consumption, with significant potential remaining in the service consumption sector. China is at the starting point of the "spiritual consumption era." High-quality companies in the new consumption sector have strong growth attributes. 2) Collective breakthroughs in technological innovation have boosted national confidence, especially confidence in the country's destiny. After years of accumulation, relying on China's strong manufacturing capabilities and solid basic education, technologies represented by DeepSeek, robots, sixth-generation aircraft, and innovative drugs have emerged, showcasing China's strong comprehensive competitiveness.

Four, The New Era of Hong Kong Stocks: Reconstruction of International Order, Illuminating the Pearl of the Orient; China's Asset Revaluation Drives Long Bull Market in Hong Kong Stocks

• The deep logic of the Hong Kong stock market has changed - The central government is firmly consolidating and enhancing Hong Kong's status as an international financial center.

• The ecological environment of the Hong Kong stock market has changed - The Hong Kong stock market is welcoming a wave of high-quality company listings, with continuous inflows of incremental funds from both domestic and overseas. 1) Since 2023, China's central bank, the China Securities Regulatory Commission, and other departments have successively introduced multiple policies to assist companies in listing in Hong Kong. The Hong Kong Stock Exchange, represented by FINI, has undergone institutional reforms that significantly enhance the market's capacity to absorb listings. 2) The wave of high-quality companies in the new consumption and technology sectors listing in Hong Kong injects fresh blood into the Hong Kong stock market.

• This round of bull market in Hong Kong stocks will continue to benefit from China's asset revaluation, and the phoenix tree reconstructed by technology and new consumption will surely attract global golden phoenixes. 1) Historically, Hong Kong can leverage its advantages as an international financial center to attract global investors with its high-cost-performance quality assets, promoting China's asset revaluation and even leading to a major bull market. From 2018 to 2020, high-quality assets in the new economy experienced an independent market. 2) Compared globally, the Hong Kong stock market now has many growth-oriented consumer companies and technology and advanced manufacturing enterprises represented by artificial intelligence and robotics, with high cost-performance ratios.

Five, Investment Strategy: Strategically Long on the New Era of Hong Kong Stocks, Tactically Steady and Balanced in Offense and Defense

• Market Outlook: In the second half of 2025, after the storm, the rainbow will appear, and the Hong Kong stock market will trend upward.

1. First Phase: Before the Chinese economy fully digests the impact of tariffs, the Hong Kong stock market may maintain a "bottom-lifting large box oscillation" pattern. Substantial progress has been made in China-U.S. trade negotiations; however, Trump's tariff policies have already impacted the U.S., China, and the global economy and will continue to do so. The international economic and trade order will not return to the state before April 2, 2025.

2. Second Phase: After the Chinese economy has fully digested the impact of tariffs, as the effects of Chinese economic policies become evident, the Hong Kong stock market is expected to welcome improvements in both fundamentals and risk appetite, embarking on a journey to new highs.

• Investment Style: Under the influence of incremental funds, the "A-shareization" of Hong Kong stock investments may become a trend.

1. Incremental Capital Analysis: Domestic capital gradually becomes the backbone of the Hong Kong stock market. Active domestic capital is an important incremental driving force for the Hong Kong stock market in 2025. Investment strategies from the A-share market, such as thematic investment, new stock speculation, and trading of newly listed stocks, are spreading to the Hong Kong stock market, enhancing trading activity. In a low-interest-rate environment, long-term allocation funds such as insurance capital remain an important force for buying Hong Kong stocks.

2. The "A-shareization" of Hong Kong stocks will affect the investment opportunity exploration and investment rhythm in the Hong Kong stock market. Firstly, it breaks the dull environment of "Hong Kong stocks have no dreams," increasing investors' tolerance for the valuation of growth assets. Funds are no longer concentrated only on high-certainty leading stocks but are spreading to second-tier leaders and small and mid-cap stocks. Secondly, market speculation has intensified. The Hong Kong stock market, as an efficient and convenient refinancing channel that allows short selling, requires thematic investment to pay attention to the impact of chip structure and market risk appetite on stock prices.

• Investment Opportunities: Both offense and defense, "Military + Technology + New Consumption + New Stocks" is the spear, "Gold + Dividends" is the shield.

1. Technology & New Consumption: Growth investment needs to distinguish between trends and noise, and between true growth and themes. Technology and new consumption are the two main growth lines currently. From April to September 2025, there will be a peak period for the lifting of restrictions on share sales. For truly growing stocks, adjustments caused by lifting restrictions and reductions in holdings are noise, presenting good buying opportunities.

—— Investment Clues in Technology: First, AI drives growth in downstream applications, opening up the commercialization space for B-end SaaS ecosystems, while the C-end is optimistic about domestic internet giants gaining a larger share in the super traffic competition. Second, investment opportunities in the intelligent assisted driving-related industrial chain. Third, robotics. Fourth, innovative drugs.

—— Investment Clues in New Consumption: Trendy toys, gold jewelry, urban outdoor, new-style dining, domestic beauty care, trendy discount retail, OTA, gaming, etc.

1. Gold & Military: Strategic assets in the era of global order reconstruction.

2. Opportunities in New Stocks & Newly Listed Stocks: The trend of emerging growth technology companies, new consumption brands, and advanced manufacturing enterprises going public in Hong Kong is continuing to heat up.

3. Dividend Stocks: Dividend yields still have appeal for allocation-type funds.

I. The turbulent period of international order reconstruction is coming, and there may be three major opportunities for asset allocation.

(1) Learning from history, asset allocation during the turbulent period of international order in the 1970s.

In the 1970s, the deepening of great power games, the United States faced political and economic dilemmas, especially the collapse of the Bretton Woods system, the failure of the Vietnam War, and the oil crisis, marking the entry of the international political and economic order into a turbulent and reconstruction period. In 1965, President Johnson implemented the "Great Society" welfare program, compounded by the Vietnam War, leading to sustained fiscal pressure on the U.S. government. The U.S. current account deficit continued to narrow, turning negative in 1969. The U.S. gold reserves repeatedly declined, and ultimately in 1971, Nixon unilaterally announced the termination of the dollar's convertibility into gold, leading to the collapse of the Bretton Woods system Disasters do not come alone. In 1973, the U.S. military was forced to withdraw from Vietnam, losing the Vietnam War, and the oil crisis broke out.

The 1970s was a turbulent period for the global order, giving rise to a super bull market in gold. The catalysts were the collapse of the Bretton Woods system and the oil crisis, essentially due to the new phase of great power competition, the political and economic decline of the United States, and the outbreak of a trust crisis in the U.S. dollar as the global reserve currency, leading to a decade-long depreciation cycle of the dollar.

• In the 1970s, the U.S. economy fell into stagflation, with the depreciation of the dollar and imported inflation creating positive feedback. The collapse of the Bretton Woods system in 1971, the Federal Reserve's easing under the Nixon administration's electoral goals, and the oil crisis of the 1970s led to a surge in commodity prices, including oil priced in dollars, creating sustained inflationary pressure that ultimately undermined the momentum of U.S. economic growth.

• Faced with great power competition in the 1970s, the U.S. government continuously implemented deficit financing and multiple "tax cuts" to stimulate the economy, which instead led to a continuous deterioration of U.S. fiscal pressure and weakened the credibility of the dollar. The large-scale tax cuts under Nixon's Tax Reform Act of 1971 and Carter's push for the Economic Stimulus Appropriations Act of 1977 to increase job opportunities and reduce taxes for low- and middle-income earners were notable examples.

• The U.S. implemented a "weak dollar" policy, attempting to restore its competitiveness by depreciating against other major currencies, which was also detrimental to the stability of the dollar. In the 1970s, the dollar depreciated significantly against the yen, Deutsche Mark, and French franc, with the dollar index falling from 120 in 1971 to around 85 in 1980.

In the 1970s, the U.S. and European stock markets fell into a decade-long "non-bull market" oscillation under stagflation, while the Japanese stock market significantly outperformed U.S. stocks. The major economies of the U.S. and Europe faced stagflation in the 1970s, leading to poor performance in the stock markets, with the S&P 500 index trapped in a range oscillation for about 10 years. In contrast, Japan maintained relatively stronger economic growth, with significant upgrades in pillar industries like automobiles and notable technological advancements, resulting in excellent performance in the Japanese stock market.

(2) The current international order has once again entered a period of turbulence, and uncertainty will be the norm.

The "unipolar dominance" of the U.S. since the end of the Cold War is beginning to crumble from within. The current internal situation in the U.S. shares many similarities with the 1970s. In recent years, the U.S. government debt ratio has continued to rise, with government debt accounting for 122.3% of GDP in 2023. The U.S. deficit ratio has remained at historically high levels, with a heavy interest burden: in the fiscal year 2024, 3.1% of the deficit ratio of 5.6% is accounted for by interest payments, exceeding half of the total deficit

• In the United States, whether measured by income or wealth disparity, the gap between the rich and the poor has reached historically high levels. With significant wealth inequality and increasing ethnic divisions, it is difficult for any party in power to reduce welfare spending under voter pressure.

• The environment of great power competition requires the United States to maintain competitiveness in military, technology, and economic fields. The U.S. government's military budget expenditures are hard to cut and may even rise further.

• After the 2008 financial crisis and the impact of the 2020 pandemic, both the Democratic and Republican parties adopted "fiscal monetization" policies to stimulate the economy.

In the medium term, the "reciprocal tariffs" initiated by the Trump administration essentially shift the internal debt risks and social conflicts that are difficult to resolve outward. However, this is likely to trigger supply shocks similar to the oil crisis of the 1970s, thereby impacting the U.S. and global economy, and subsequently exerting medium-term pressure on U.S. stocks.

• On one hand, the Trump administration attributes the economic difficulties in the U.S. to unfair international trade, attempting to increase fiscal revenue by raising tariffs, while harboring the delusion that increasing tariff barriers will ultimately lead to the return of manufacturing to domestic shores.

• On the other hand, the Trump administration shifts the responsibility for employment and social issues onto immigrant groups, tightening immigration policies to cater to the demands of specific domestic voter groups.

• Both of these policies could lead to short-term increases in commodity and labor costs, thereby increasing inflationary pressures in the U.S. in the short term, and posing recession risks to the U.S. economy in the medium term, which in turn affects the global economy.

In the long term, the international economic and financial order dominated by the U.S. over the past 30 years is being dismantled by the U.S. itself, and the credibility of the dollar system will face profound challenges. The so-called reciprocal tariff policy will further erode the trust in the dollar in international markets.

• Fiscal pressures force the U.S. to reassess its global strategic positioning. On April 2, the Trump administration launched a so-called "reciprocal tariff policy" with "sky-high prices" globally, boasting expertise in the "art of negotiation," which is essentially profit-driven, attempting to bully other countries using its hegemony and trampling on the international rules and order established during the 30 years of economic globalization.

• The U.S. ability to supply global public goods is declining, weakening the attractiveness and influence of the dollar as the world's dominant currency.

• Following the outbreak of the Russia-Ukraine conflict, the comprehensive financial sanctions led by the U.S. against Russia prompted many countries worldwide to reassess the safety of their foreign exchange reserve assets, accelerating the process of reserve diversification. Data clearly reflects this trend: the dollar's share in global foreign exchange reserves has significantly decreased from over 70% before 2000 to 57.8% in 2024.

(3) During the turbulent period of international order, three major allocation opportunities to cope with "uncertainty"

From a long-term perspective, the old international economic and financial order is disintegrating, and the reconstruction of the new order is often a long and turbulent process. Looking ahead to the next few years, asset allocation can focus on three major opportunities.

First, gold, military industry, digital assets, etc., are strategic assets during the turbulent period of international order. With the intensification of trade frictions and geopolitical conflicts, the hegemony of the US dollar is weakening, and the demand for gold as a substitute for sovereign currencies like the US dollar will continue to increase, similar to the gold bull market of the 1970s. Due to the complex and changeable international environment, the monetary attributes of digital assets will continue to rise, and major economies will also continue to increase national defense spending.

Second, opportunities related to technological innovation. The new round of technological revolution represented by AI and robotics will be key to building a "inclusive" global economic new order and alleviating the isolationism of the US that relies on its neighbors.

Third, the allocation opportunity of China's asset revaluation against the backdrop of country-specific asset allocation rebalancing. In the face of uncertainty in turbulent times, investors will seek higher cost-effectiveness and greater winning rates in the process of country-specific asset allocation. Currently, it is possible to increase the allocation of equity assets in "non-US" regions. From multiple dimensions such as valuation and risk premium, the cost-effectiveness of stock markets in countries like China and Europe is better.

II. The US stock market is likely to face challenges in the second half of 2025, but it may not necessarily be negative for China

(1) The US economy may struggle to avoid a downturn in the second and third quarters of 2025

The US economy may have already entered a downward cycle in 2025. In the first quarter of 2025, the US GDP year-on-year rate was -0.3%. In addition to being affected by the surge in imports due to tariff avoidance uncertainties, the decline in government spending dragged GDP down by 0.25 percentage points, and personal consumption expenditure year-on-year rate of 1.21% is also the lowest since the third quarter of 2023. The "reciprocal tariff" policy will further exacerbate the downward pressure on the US economy. According to estimates from various US think tanks, a 10% tariff increase globally would impact GDP by 0.13-0.35 percentage points.

Moreover, US inflation remains persistently high, with core CPI declining slowly, and the year-on-year growth rate of core CPI still at a high level of 2.8%. The "reciprocal tariff" policy will further hinder the decline of inflation. According to estimates from various US think tanks, a 10% tariff increase globally would impact CPI by 0.6-0.8 percentage points.

The policies of the Trump administration are filled with strong uncertainties, which may still lead to twists and turns in global trade negotiations, ultimately affecting the confidence of American entrepreneurs and consumers. Although substantial progress has been made in negotiations between the US and China, it will still have a negative impact on the US-China economy. This is not the end of a major deal, but the beginning of the reconstruction of the international economic and trade order. The US "reciprocal tariff" war has profoundly impacted the global order

(2) U.S. Treasury rates may be difficult to decline significantly in the second half of the year

In the second half of the year, the Federal Reserve needs to make trade-offs between "controlling inflation" and "supporting economic growth," and its attitude towards interest rate cuts may be more cautious than the market consensus. Federal Reserve Chairman Jerome Powell clearly stated in a speech at the Chicago Economic Club on April 16 that it is possible for both unemployment and inflation to rise simultaneously, and he is concerned that tariffs could disrupt supply chains and lead to "broader price pressures," while the Fed's responsibility is to ensure that this pressure does not evolve into long-term inflation expectations spiraling out of control.

Considering that inflation in the U.S. will still have high stickiness in the second and third quarters, the 10-year U.S. Treasury yield may not have much room for decline. In the medium to long term, the weakening of U.S. dollar credit will also reduce the long-term attractiveness of U.S. Treasuries, and global capital reallocation will constrain the downward space for U.S. Treasury yields.

(3) U.S. stocks may face a double whammy of valuation and earnings in the second half of the year, with global capital flowing into high-quality assets with low correlation to U.S. stocks

The earnings growth rate of U.S. stocks still has room for downward adjustment in the second half of the year. Since the announcement of tariff policies on April 2, the consensus earnings expectations for the S&P 500 index have been further revised down, with the growth rate consensus for 2025 now down to 10%, which is higher than the 7% compound growth rate over the past 20 years.

The gross profit margin and net profit margin of S&P 500 non-financial companies are currently at historical highs, and considering the risks of economic downturn and the impact of tariffs, there may be subsequent downward adjustments. If U.S. companies do not pass on tariff costs, it means a squeeze on profit margins; if they pass on to consumers, then revenues will ultimately be affected.

U.S. stock valuations will face downward pressure in the next six months, and short-term valuations will be influenced by earnings adjustments and macro policy uncertainties. Currently, the forecast PE ratio of the S&P 500 index is still above the 75th percentile since 1990, while the forecast PE ratio of the Nasdaq index is above the median since November 2001.

The long-term concern for U.S. stock valuations is the weakening of the U.S. technology advantage. China's breakthroughs in the AI field are reshaping the global technology competition landscape, weakening the valuation premium of U.S. AI hegemony. Correspondingly, the emergence of Deepseek R1 at the beginning of the year led to a peak and subsequent decline in the U.S. Nasdaq In the future, global investors are expected to rebalance their technology stock allocations, shifting from an over-concentration on American tech giants in recent years to investing in high-quality Chinese technology companies.

First, Deepseek has lowered the threshold for AI technology and accelerated the global diffusion of AI technology. The technological advantage of American companies is no longer a monopoly, which directly challenges the basis of their high valuations.

Second, AI competition is shifting from hardware to downstream applications. China has rich application scenarios and leading data infrastructure, and is not lagging behind American companies in application innovation.

The risk premium of U.S. stocks has not fully priced in the long-term uncertainties of American assets. Since 1973, the risk premium of U.S. stocks has shown very strong temporal characteristics. During the stagflation period in the 1970s and the financial crisis period from 2008 to 2020, the risk premium of U.S. stocks was relatively high, around 4%. In contrast, during the 1980s and 1990s, when American political and economic power was strong, the risk premium of U.S. stocks was in negative territory.

Global capital allocation between U.S. stocks and "non-U.S. assets" may become more balanced. In the past two years, the "American exceptionalism" narrative has prevailed, leading to a crowded influx of global capital into U.S. stocks. Due to uncertainties in American political and economic spheres and the overvaluation of U.S. stocks, global capital may reduce its excessive allocation to U.S. stocks and increase holdings in high-quality "non-U.S." assets in the near future.

• From a cyclical perspective, the U.S. currently faces rising inflationary pressures and risks of economic slowdown, making it difficult for monetary policy to further ease to counter economic pressures. In contrast, countries affected by U.S. tariff policies, including China and the European Union, will counteract these pressures through more proactive monetary and fiscal policies.

• From a long-term perspective, the great power competition and the unpredictability of U.S. politics and policies affect the credibility of the dollar, leading to a decline in the dollar's status as a reserve currency, which in turn undermines the credibility of dollar-denominated assets.

III. China's capital market has great potential, with stable indices and structural bull markets

(1) The international environment is "stable in the East and turbulent in the West," and the Chinese stock market will benefit from the new international order.

Since 2025, the political and economic situation overseas has become increasingly turbulent, with frequent tariff frictions and regional military conflicts, while China has become a stable anchor for global economic growth. The Politburo meeting in April pointed out the need to adhere to the general principle of seeking progress while maintaining stability, coordinating domestic economic work and international economic and trade struggles, focusing on stabilizing employment, enterprises, markets, and expectations, and responding to the uncertainties of rapidly changing external environments with the certainty of high-quality development Domestic economic work insists on solving development problems through deepening reform and opening up, emphasizing the certainty of high-quality development in response to external challenges. Additionally, it stresses bottom-line thinking and dynamic game theory, fully preparing contingency plans, and timely launching incremental reserve policies based on changes in the situation, strengthening extraordinary counter-cyclical adjustments.

The ideas of China's economic work have boosted the confidence of domestic and foreign investors in the Chinese economy and the Chinese stock market through a series of meetings and policy implementations, including the "9.24 Financial Support for High-Quality Economic Development" press conference, "2.17 Private Enterprise Symposium," and "5.7 A Package of Financial Policies to Support Market Stability and Expectations."

In 2025, the expectations for the Chinese stock market and the Chinese economy will begin to form positive feedback, stabilizing the stock market and the real estate market—stabilizing confidence and expectations—wealth effects driving consumption and investment willingness—frequent positive news in technology and emerging consumption.

In the face of external shocks and international economic and trade struggles, we advocate for the construction of a new international order. China is unwavering in expanding high-level opening up, advocating for a community with a shared future for mankind, promoting an equal and orderly multipolar world, and inclusive economic globalization. Together with the international community, we actively maintain multilateralism, oppose unilateral bullying behavior, and resolutely fight against tariff stick actions. The unilateral bullying behavior of the United States has provided conditions for China to actively build new circles of friends.

(2) Key structural highlights of China's asset revaluation—Technology + New Consumption

1. New Consumption—Service Consumption, Spiritual Consumption, AI Consumption, etc.

As the pain period of the transition from old to new economic drivers gradually ends, the real estate market is stabilizing at the bottom, and the Chinese economy is entering a new stage of high-quality development. In recent years, the state has promoted "old for new" exchanges, increased the income of low- and middle-income groups, and vigorously developed service consumption, enhancing the role of consumption in driving economic growth. The cumulative effects of these policies have led to structural highlights in Chinese consumption, particularly in the new consumption and service consumption sectors, which continue to bring surprises.

China still has enormous potential in the service consumption sector. This year's May Day holiday saw a significant recovery in service consumption, with immersive cultural and tourism integration scenarios becoming a new engine, showcasing the market potential under the new consumption model. Referring to Japan after the 1990s, although overall economic growth remained low, the proportion of consumption in GDP remained stable, while service consumption maintained rapid growth, with its proportion of GDP continuously rising.

The rise of spiritual consumption. In an era of material abundance, consumers no longer simply pay for the functionality of goods but seek emotional resonance or identity construction through consumption behavior. China is at the starting point of the "spiritual consumption era," leading to the emergence of more new business models. Companies like Pop Mart and Lao Pu Gold have seized the structural shift in consumption, meeting consumer demands, and thus achieving explosive growth in a lackluster consumption market AI Consumption: A series of new consumption formats, models, scenarios, and services formed by the innovation and application of new-generation technologies such as artificial intelligence.

In line with the trend of consumption upgrading, China's stimulus policies focus on service consumption supply and support for new consumption development. The Politburo meeting pointed out the need to increase the income of low- and middle-income groups and vigorously develop service consumption. The "Special Action to Boost Consumption" requires the active development of service supply for "the elderly and children," silver-haired consumption, cultural tourism consumption, ice and snow consumption, and inbound consumption, as well as support for the development of original intellectual property (IP) brands.

From a micro perspective of enterprises, these consumption companies have obvious growth attributes, possess strong self-financing capabilities, and their free cash flow and return rates measured by free cash flow are at a relatively good level across the market.

1. Collective breakthroughs in technological innovation have boosted the confidence of the Chinese people, especially national confidence.

After years of accumulation, relying on China's strong manufacturing strength and solid basic education, technologies represented by DeepSeek, robotics, sixth-generation aircraft, and innovative drugs have emerged, showcasing China's strong capabilities and global competitiveness in technological innovation.

In the field of artificial intelligence, domestic large models such as DeepSeek have narrowed the gap with international giants like OpenAI and Google. The model equity brought by DeepSeek promotes the acceleration of AI strategy implementation on the B-end, with the related application ecosystem transitioning from "tools" to "intelligent agents," and business models maturing rapidly; on the C-end, AI entry points have redefined internet traffic, extending monetization opportunities from membership subscriptions to advertising, e-commerce, and other multi-channel avenues.

The wave of humanoid robot industry is approaching in 2025, with China's complete supply chain, a superior scale of high-level skilled workers and engineers, and strong mass production capabilities. There are leading companies such as UBTECH, XAG, and Yushu, along with a complete supply chain, where domestic hardware suppliers in various segments can release production capacity more quickly due to their advantages in scale production and rapid response.

In the field of innovative drugs, China's pace towards becoming a strong country in innovative drugs has significantly accelerated. The number of original research innovative drugs developed by Chinese companies is expected to reach 704 by 2024, ranking first in the world; American companies develop 400-500 innovative drugs annually. China is gradually becoming one of the main driving forces for global drug research and development growth. In terms of drug transactions, the license-in transactions of Chinese pharmaceutical companies have dropped to below 20% in 2024, while the enthusiasm for license-out transactions has gradually increased, with the proportion rising to over 40% in 2024

IV. New Era for Hong Kong Stocks: Reconstruction of International Order, Illuminating the Pearl of the Orient; Revaluation of Chinese Assets, Driving Long-term Bull Market in Hong Kong Stocks

(1) The underlying logic of the Hong Kong stock market has changed — the central government is determined to consolidate and enhance Hong Kong's status as an international financial center.

From a strategic overall perspective, the 2023 Central Financial Work Conference clearly required the consolidation and enhancement of Hong Kong's status as an international financial center. Subsequently, from policy support to resource allocation, maintaining Hong Kong's status as an international financial center has been regarded as a top priority, providing solid support in all aspects.

• In November 2024, Vice Premier He Lifeng attended a summit in Hong Kong and delivered a speech, expressing the central government's high regard and firm support for the financial development of Hong Kong, stating, “Building, consolidating, and developing Hong Kong as an international financial center is not only necessary for Hong Kong but also important for the country.”

• The People's Bank of China has repeatedly emphasized the firm maintenance of Hong Kong's status as an international financial center on various occasions. Pan Gongsheng, Governor of the People's Bank of China, stated at the opening ceremony of the Asian Financial Forum in January 2025 that the proportion of long-term funds from foreign exchange reserves allocated to Hong Kong financial assets will be increased.

• On March 27, 2025, Qi Bin, Deputy Director of the Hong Kong Liaison Office, stated during a speech at the Boao Forum for Asia 2025: “The Hong Kong capital market is not only crucial for consolidating and enhancing Hong Kong's status as an international financial center but also an important lever for driving solutions to issues in consumption, finance, technology, real estate, and other areas, promoting Hong Kong from governance to prosperity. It is an inevitable choice for promoting China's technological innovation and industrial upgrading, working together with the A-share market to become a world-class capital market.” “The Hong Kong capital market should accelerate its integration with technology enterprises to create a 'Chinese Silicon Valley'.” “Introducing more long-term funds such as foreign exchange, social security, and international pensions will enhance market stability and hedge against risk factors.”

(2) The ecological environment of the Hong Kong stock market has changed — a wave of quality enterprises is listing in Hong Kong, with continuous inflow of incremental funds from both domestic and foreign sources.

1. The reforms by mainland regulatory authorities and the Hong Kong Stock Exchange have significantly enhanced Hong Kong's market capacity.

Since 2023, the People's Bank of China, the China Securities Regulatory Commission, and other departments have successively introduced multiple policies to facilitate enterprises listing in Hong Kong, simplifying the listing process, enhancing transparency, broadening financing channels, and encouraging enterprises to accelerate international development under compliance The Hong Kong Stock Exchange's institutional reform represented by FINI (Fast Interface for New Issuance) has significantly enhanced the market's capacity in Hong Kong. FINI optimizes the new stock issuance process and strengthens the competitiveness of the Hong Kong IPO market by shortening the settlement cycle, reducing capital occupation, and improving transparency. The Hong Kong Securities and Futures Commission and the Hong Kong Stock Exchange jointly launched the "Special Line for Science and Technology Enterprises" to further facilitate the listing applications of specialized technology and biotechnology companies, allowing these companies to submit listing applications confidentially.

Since 2024, the recovery of Hong Kong stock IPOs has mainly been driven by the technology and consumer sectors, with many rapidly growing technology companies and new consumer companies, such as Horizon Robotics-W, Mixue Group, Mao Ge Ping, BluCactus, and Lao Pu Gold.

1. The wave of high-quality enterprises from the new consumption and technology sectors listing in Hong Kong injects fresh blood into the Hong Kong stock market.

The wave of high-quality enterprises from the new consumption and technology sectors listing in Hong Kong injects fresh blood into the Hong Kong stock market, enhancing market vitality. In recent years, the evolution of market capitalization distribution in the Hong Kong stock market reveals the growing influence of the consumer, technology, and healthcare sectors. As of December 31, 2024, the total market capitalization of these sectors reached HKD 18,847.81 billion, accounting for 54.5% of the total market capitalization of the Hong Kong stock market.

(3) This round of the bull market in Hong Kong stocks will continue to benefit from the revaluation of Chinese assets, and the phoenix tree restructured by technology and new consumption will surely attract global investment.

1. Learning from history, Hong Kong can leverage its advantages as an international financial center to attract global investors with its high-cost-performance quality assets, promoting the revaluation of Chinese assets and even leading to a major bull market.

After 2018, Hong Kong stocks welcomed a wave of new economy companies represented by Meituan and the return of leading Chinese concept stocks such as internet platforms, resulting in a significant change in the market capitalization structure—declining proportions of finance and real estate and increasing proportions of new economy companies. Although the Hang Seng Index fluctuated within a range from 2018 to 2020, high-quality assets in the new economy showed independent trends, with the Hang Seng Technology Index performing significantly stronger.

1. In a global comparison, Hong Kong stocks now have many growth-oriented consumer companies and technology and advanced manufacturing enterprises represented by artificial intelligence and robotics, with high cost-performance ratios.

In a global comparison, the Chinese stock market, especially Hong Kong stocks, now has many growth-oriented consumer companies and technology and advanced manufacturing enterprises represented by artificial intelligence and robotics, which are abundant in number and have high cost-performance ratios compared to global stock markets.

1. Growth-oriented consumer companies: According to the following criteria, companies in the global GICS classification under essential and discretionary consumption, with the latest annual revenue exceeding $1 billion, a market capitalization greater than $1 billion, a compound annual growth rate of revenue over the past 5 years greater than 15%, and a year-on-year revenue growth rate of no less than 10% in the last 2 years, we have screened a total of 41 companies, of which 17 are from China.

2. China has made breakthroughs in the field of artificial intelligence, and these leading internet companies that can benefit from AI development are more cost-effective compared to their U.S. counterparts.

3. In the Hong Kong stock market, there are also an increasing number of globally competitive advanced manufacturing companies, including the humanoid robot industry chain, new energy industry chain, and technology hardware industry chain.

The profit effect of high-quality companies represented by the Hang Seng Technology Index constituents creates a virtuous cycle, attracting continuous inflow of incremental funds from both domestic and overseas into the Hong Kong stock market, thereby driving the revaluation of more companies.

V. Investment Strategy: Strategically go long on Hong Kong stocks in the new era, tactically steady and balanced in offense and defense

(1) Market Outlook: In the second half of 2025, after the storm, the rainbow will appear, and the Hong Kong stock market will trend upwards with fluctuations.

In the first phase, before the Chinese economy fully digests the impact of tariffs, the Hong Kong stock market may maintain a "bottom-lifting large box fluctuation" pattern. Substantial progress has been made in China-U.S. trade negotiations; however, Trump's tariff policy has already impacted the U.S., China, and even the global economy and will continue to do so. The international economic and trade order will not return to the state before April 2, 2025.

• According to the "Joint Statement of the China-U.S. Geneva Economic and Trade Talks," the U.S. has committed to suspending the implementation of a 24% "reciprocal tariff," which will be suspended for the initial 90 days, retaining 10% of the tariff. Therefore, the U.S. tariffs on China have decreased from 145% to 30% (i.e., 20% fentanyl tax + 10% retained tariff). According to the macro research team at Industrial Securities, it is estimated that every additional 10% tariff imposed by the U.S. on China will drag down China's actual GDP by 0.28 percentage points
• Beware of the risk of the Trump administration "turning its back" again and refusing to acknowledge agreements. During the China-U.S. trade negotiations in 2018, the Trump administration repeatedly changed its stance. Substantial progress was made in high-level China-U.S. economic and trade talks, significantly reducing bilateral tariff levels, which is beneficial for the Chinese stock market. However, we must remain vigilant about the potential "turning back" risks during the implementation of the agreement details, especially regarding changes in the tariff suspension that expires at the end of June and early July.

In the second phase, after the Chinese economy has fully absorbed the impact of tariffs, as the effects of Chinese economic policies become evident, the Hong Kong stock market is expected to see improvements in both fundamentals and risk appetite, embarking on a journey to new highs.

• The timing of the weakening U.S. economic data and changes in Federal Reserve policy will affect the global liquidity environment and capital flows, possibly as early as September. Pay attention to the "X" date around the U.S. debt ceiling; according to the CBO's estimates, the government's ability to borrow using extraordinary measures may be exhausted by August or September 2025.

• The timing and effectiveness of further incremental stimulus policies in China. Focus on the Politburo meeting at the end of July, the mid-year performance period in August, and the commemoration of the 80th anniversary of the victory in the War of Resistance Against Japan in September.

(2) Investment Style: Under the influence of incremental funds, the trend of "A-share-like" investment in Hong Kong stocks may emerge.

1. Incremental Fund Analysis: Domestic capital is gradually becoming the backbone of the Hong Kong stock market.

Domestic active funds are an important incremental driving force for the Hong Kong stock market in 2025. The participation of public funds, private funds, and high-net-worth investors in Hong Kong stocks has significantly increased. Investment strategies such as thematic investment, new stock speculation, and the trading of newly listed stocks from A-shares are spreading to Hong Kong stocks, leading to a significant increase in trading activity in the Hong Kong stock market compared to the past four years, with the turnover rates of the Hang Seng Index and the Hang Seng Composite Index at historical highs.

• Although the overall proportion of funds allocated to Hong Kong stocks is already at a historically high level, it may still continue to rise. The main reason is that there are more quality assets in Hong Kong stocks worth allocating. This can be seen from the heavy holdings of Hong Kong stocks by funds, which are mainly concentrated in quality growth stocks in technology and new consumption.

In a low-interest-rate environment, long-term allocation funds such as insurance capital remain an important force in buying Hong Kong stocks. In 2024, southbound capital will prefer high-dividend stocks, while in 2025, a variety of sectors will flourish, with consumer technology attracting more incremental funds, and high dividends continuing to flow in.

The proportion of foreign capital reflected by international intermediaries is still declining overall. When uncertainties in overseas policies decrease and global risk appetite returns to normal, Hong Kong stocks are expected to attract overseas capital inflows due to their unique fundamentals.

2. "Hong Kong stocks becoming A-share-like" affects the investment opportunity exploration and investment rhythm of Hong Kong stocks.

Firstly, it breaks the dull environment of "Hong Kong stocks have no dreams," increasing investors' tolerance for the valuation of growth assets. Funds are no longer concentrated solely on high-certainty leading stocks but are spreading towards second-tier leaders and small to mid-cap stocks.

Secondly, the market's speculative nature has intensified. As an efficient and convenient refinancing channel that allows short selling, thematic investments in Hong Kong stocks need to pay more attention to the impact of chip structure and market risk appetite on stock prices.

(3) Investment opportunities: Both offense and defense, "military industry + technology + new consumption + new stocks" as the spear, "gold + dividends" as the shield.

1. Technology & New Consumption: Growth investment needs to distinguish between trends and noise, and between true growth and themes.

Technology and new consumption are the two main growth lines currently. The overall performance growth of Hong Kong stocks is relatively slow in 2025. Apart from industries affected by low base effects, technology and non-essential consumption are rare sectors where EPS growth can maintain above 10%.

Growth investment needs to distinguish between trends and noise, and between true growth and themes. Hong Kong stock IPOs will accelerate starting in the second half of 2024, with a peak period for the lifting of lock-up shares from April to September 2025. For truly growth stocks, adjustments caused by lifting restrictions and reductions are noise, presenting good buying opportunities.

Investment clues in technology:

1. AI drives growth in downstream applications. On the B-side, DeepSeek's open-source model allows enterprises to gain stronger model capabilities while significantly reducing computing costs, promoting the transition of the SAAS ecosystem from "tools" to "intelligent agents," gradually opening up commercialization space and accelerating industry growth. On the C-side, AI entry has redefined internet traffic, extending monetization space from membership subscriptions to advertisements, e-commerce, and other channels. We are optimistic about domestic internet giants leveraging their ecosystem, technology, and capital investments to gain a larger share in the super traffic competition.

2. Intelligent assisted driving: The maturity of technologies such as VLA and world models, the decrease in costs, and the gradual improvement of policies and regulations are accelerating the evolution of advanced intelligent driving across all scenarios. Pay attention to leading technology companies and investment opportunities in the industry chain.

3. Robotics: Benefiting from technological advancements, an aging population, and rising labor costs, the global humanoid robot industry is emerging, with mass production on the horizon. Manufacturers of the main body and upstream supply chains will benefit from long-term demand prosperity

4. Innovative Drugs: China's innovative drugs have achieved a transformation from quantitative change to qualitative change, gradually shifting from "followers" to "leaders." China is becoming one of the main driving forces for global drug research and development growth. Internationalization continues to accelerate. Domestic pharmaceutical companies are beginning to focus on innovative drug projects in the early stages of domestic research and development. On the domestic policy front, the encouragement of innovation across the entire chain is expected to drive overall improvements in the domestic business model for innovative drugs.

Investment Clues in New Consumption:

• Trendy Toys: The potential for IP development in China remains relatively limited, especially in terms of category richness and demographic coverage. Blind box figures, cards, and building blocks have already produced leading players in their respective niche categories.

• Gold and Jewelry: Cultural brands are breaking through barriers rapidly, abandoning the model of earning processing fees. Brands are meeting the consumption needs and identity recognition of high-net-worth individuals by selling craftsmanship and culture, while also ensuring value retention, leading to a flourishing trend.

• Urban Outdoor: Urban outdoor activities have become a new lifestyle, satisfying the "micro-vacation" spiritual needs of refined urbanites and giving rise to diversified niche segments.

• New-style Dining: For example, new-style tea drinks represent the emerging consumption values of young people, with keywords being novelty, social interaction, and brand culture. Various tea beverage listed companies maintain an active pace of store openings, and the franchise-based light asset model has established excellent cash flow.

• Domestic Beauty and Personal Care: A new track for functional skincare products is emerging, capturing opportunities for domestic substitution in the mass beauty market, with breakthroughs in upgrading single products and accelerated growth in domestic high-end beauty online.

• Trendy Discount Retail: Small orders with quick responses and high turnover, combined with IP support, create immersive shopping scenarios that bring continuous growth points.

• OTA: Domestic tourism has entered a "policy dividend + consumption upgrade" dual-driven phase. It is expected that by 2025, tourism revenue growth will continue to exceed GDP growth. The continuous optimization of visa-free policies, along with the explosive popularity of "China Travel" on overseas social networks, is ushering in strong development momentum for cross-border and overseas market demand.

• Gaming: Demand remains stable, policies are encouraging, and leading platforms have entered a new product cycle.

1. Gold & Military Industry: Strategic Assets in the Era of Global Order Reconstruction

Gold: In the long term, gold is a strategic asset for hedging against periods of international order turbulence. In the medium term, gold benefits regardless of whether the U.S. economy experiences stagflation or recession. In the short term, gold may fluctuate as uncertainties from trade wars cause it to retreat from its peak, but as mentioned in the first part, this is a turbulent period of international order reconstruction and the dawn of a new order, so the periodic correction of gold presents an opportunity based on long-term allocation.

Military Industry: The prosperity of the military industry is expected to significantly improve by 2025, with the far-reaching impact of the India-Pakistan air conflict strategically enhancing the long-term allocation value of China's military assets. Driven by the centenary goal of building a strong military, demand in the military industry is expected to continue to grow, with demand for platform-type products likely to remain stable and consumption-type weapons expected to achieve rapid growth. Under the impetus of high renewal rates, aviation engines and information products will gain growth beyond the platforms themselves. New combat capabilities and low-cost sustainable equipment are expected to become new growth poles for the military industry during the "14th Five-Year Plan" period 3. Opportunities in New and Recently Listed Stocks: The trend of emerging growth technology companies, new consumer brands, and advanced manufacturing enterprises going public in Hong Kong is continuing to heat up.

As the external environment becomes increasingly complex, under the active guidance of regulatory authorities in mainland China and Hong Kong and the accelerated pace of Chinese companies going overseas, the trend of emerging growth technology companies, new consumer brands, and advanced manufacturing enterprises going public in Hong Kong is continuing to heat up. Since 2025, 79 companies have undergone initial public offering hearings, with 73% in the consumer, technology, and healthcare sectors. The pricing of new stocks in Hong Kong is more conservative and rational, creating more opportunities for discovering new and recently listed stocks.

1. Dividend Stocks: Dividend Yields Remain Attractive for Allocative Funds

In a prolonged low-interest-rate environment, the dividend yield of Hong Kong dividend stocks remains attractive for allocative funds. The dividend yield (TTM) of the Hang Seng High Dividend Yield Index is still at 8%, with a spread of over 6 percentage points compared to China's 10-year government bonds.

High Dividend Weight Banks:

1) Funding Situation: Policy stability and market confidence boosting are expected to allow the banking sector to continuously receive incremental funds from passive ETFs and insurance funds. As the largest weighted industry in the CSI 300 Index, banks fully benefit from the incremental funds brought by the expansion of passive index scales.

• The National Council for Social Security Fund clearly operates in a role similar to a "stabilization fund," continuously increasing holdings in CSI 300 ETFs and other broad-based index products. Various types of medium- and long-term funds entering the market drive the construction of a new pricing power system for undervalued high-dividend sectors like banks, leading to a revaluation of Chinese assets and generating profit effects, which in turn encourages residents to allocate to the Chinese stock market through ETFs, forming a positive feedback loop.

• Regulatory authorities are guiding medium- and long-term funds represented by insurance capital into the market. Coupled with the implementation of new accounting standards, pressure from reallocating non-standard assets upon maturity, and the interest rate downcycle, insurance funds have the motivation and conditions to continue increasing allocations to dividend assets, with stable performance and high dividends in banks being an important direction for insurance capital's increased allocation. A short-term catalyst is the announcement by Li Yunze, head of the Financial Regulatory Bureau, on May 7, to adjust solvency regulatory rules, further reducing the risk factor for insurance companies' stock investments by 10%, thereby further decreasing the capital required for insurance capital to invest in stocks, releasing more funds into the market.

2) Fundamentals: The overall asset quality of listed banks remains stable, with the non-performing loan ratio at its lowest since 2015. Structurally, the non-performing loan ratio for corporate loans continues to decline, with the current real estate sector stabilizing and accelerating debt resolution, leading to improved risk expectations in key areas; retail risks are accelerating exposure, with credit cards and consumer loans experiencing temporary pressure, but the overall proportion of retail non-performing loans is low, making the impact relatively controllable.

Public Utilities: 1) Thermal Power: This year, attention can be paid to the performance elasticity of thermal power assets, with long-term focus on the value re-evaluation of the thermal power sector after strengthening public utility attributes. 2) Hydropower and Nuclear Power: The "bond-like" asset attributes of hydropower and nuclear power stem from stable operations over many years The fluctuations in water inflow and the rise and fall of electricity prices within the year are unlikely to have a substantial impact on the valuation of hydropower and nuclear power assets. 3) Natural gas: The profitability inflection point for urban gas companies has emerged. On one hand, there is still room for improvement in the pipeline gas penetration rate by 2025, and consumption is expected to maintain an annual growth rate of 6%-8% before 2030. On the other hand, the public utility attributes brought by gross margin management and the good cash flow characteristics further highlight the investment value.

Leading state-owned real estate companies: 1) Leading real estate companies demonstrate strong risk resistance and shareholder return capabilities through optimizing financial structures and increasing dividend payout ratios. 2) Leading property management companies have operating cash flow covering net profit by more than 1 time in 2024, interest income annualized rate maintained above 1%, with ample net cash, providing a basis for maintaining high dividends. Some companies have also launched stock repurchase plans to enhance shareholder returns, and profitability still has room for continuous improvement.

Leading food and beverage companies: Leading food and beverage companies in Hong Kong have sufficient cash flow, with some companies experiencing significant growth. Dividend policies are stable and have room for improvement. Buybacks enhance comprehensive shareholder returns.

Local stocks in Hong Kong: Dividends are decoupled from cycles. The average EBIT from investment properties for local stocks in Hong Kong in 2024 accounts for 63%, providing a stable basis for dividends, and most dividend policies are decoupled from core net profit or linked to the core net profit of recurring businesses.

Author of this article: Zhang Yidong team from Xingzheng Securities, Source: Zhang Yidong Strategy World, Original title: "【Xingzheng Zhang Yidong (Global Strategy) Team】The Dawn of a New Order - 2025 Overseas Mid-term Investment Strategy"

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The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment objectives, 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