Industrial Securities: Continue to be firmly bullish on Hong Kong stocks in the long term; this round of market will develop into a super long bull market

According to the Zhitong Finance APP, Industrial Securities has released a research report stating that they remain firmly bullish on Hong Kong stocks in the long term. Global investors, especially Chinese investors, are increasingly adopting a bullish mindset towards the Chinese stock market. Industrial Securities maintains the judgment that this round of Hong Kong stock market will enter a super long bull market. In the short to medium term, they expect the Hong Kong stock market to trend upwards with fluctuations in the second half of the year, continuously reaching new highs. A Federal Reserve interest rate cut may just be a matter of time, focusing on the further stimulating momentum of liquidity in Hong Kong stocks due to the Fed's rate cuts and a weakening US dollar.

In the short term, Industrial Securities believes that the Hong Kong stock market in August will experience fluctuations and differentiation, or in other words, is poised for a breakout. The short-term market will focus more on interim report performances and cost-effectiveness. US-China trade negotiations and fluctuations in US stocks may bring about volatility and differentiation in the Hong Kong stock market, while thematic speculation may enter a period of declining risk appetite, with targets that have performance certainty being more favored.

Key points from Industrial Securities are as follows:

1. Review of Global and Hong Kong Stock Market Performance in July

In July, among global asset classes, the Chinese stock market had one of the highest gains, with the Shanghai Composite Index, Hang Seng Index, and Hang Seng Tech Index ranking high in global stock index performance.

Structure: The healthcare sector in Hong Kong stocks led the gains, with small and mid-cap stocks outperforming large-cap stocks. In July, the Hang Seng Index rose by 2.9%, and the Hang Seng Tech Index rose by 2.8%. In terms of sectors, all major sectors in Hong Kong stocks rose in July, with healthcare (+22.8%), industrials (+9.9%), and energy (+9.7%) leading the gains; in terms of style, small and mid-cap stocks outperformed large-cap stocks.

Valuation: As of July 31, the forecast PE of the Hang Seng Index was 11.3 times, close to the average level of the past 10 years; the PB was 1.18x, close to the mean +1 standard deviation level over the past 10 years; the risk premium of the Hang Seng Index measured by the yield of China's 10-year government bonds was 7.1%, situated between the mean and mean +1 standard deviation over the past 10 years.

Funds: The annual net inflow of southbound funds and the monthly trading volume ratio reached a historical high; the shareholding ratio of international intermediary institutions has rebounded. 1) In July, the net inflow of southbound funds was HKD 135.648 billion (RMB 124.104 billion), and as of July 31, the net buying of southbound funds this year has reached HKD 866.842 billion, setting a new high since the launch of the mutual market access mechanism. In July, the trading volume of the Hong Kong Stock Connect accounted for 27.5% of the main board trading volume, a historical high. 2) The shareholding value ratio of international intermediary institutions increased compared to the end of June. As of July 31, 2025, the shareholding value ratio of international intermediary institutions was 43.8%, up 0.5 percentage points month-on-month. 3) Short selling transaction ratio. As of July 31, the short selling transaction amount on the main board of Hong Kong stocks accounted for 16.0% of the total transaction amount, with a 20-day moving average of 12.7%, which decreased compared to June.

1. Outlook for the Hong Kong Stock Market: A Bull Market that is Calm and Steady, Trending Upwards

In the long term, we continue to firmly hold a bullish view on Hong Kong stocks. Global investors, especially Chinese investors, are increasingly adopting a bullish mindset towards the Chinese stock market. We maintain the judgment that this round of the Hong Kong stock market will enter a super long bull market.

1. As Hong Kong continues to thrive and the country empowers it, the status of Hong Kong as an international financial center will be continuously consolidated and enhanced in the process of restructuring the international order. 2) Hong Kong stocks and A-shares are expected to benefit from the wave of reallocation of Chinese social wealth from safe-haven assets to equity assets. 3) The ecological environment of Hong Kong stocks will continue to cycle positively, and a qualitative change has occurred compared to the past four years. High-quality enterprises, especially private enterprises in the technology and new consumption sectors, listing in Hong Kong has brought positive feedback, and incremental funds have begun to flow continuously into the Hong Kong stock market. 4) The underlying logic of investing in Hong Kong stocks has shifted from "offshore marketization" to "onshore marketization," with a more diversified investment style, and the profit-making model has further spread from "certainty premium, value dividend" to "growth premium."

In the short to medium term, the judgment of the market in the second half of the year remains a fluctuating upward trend, continuously reaching new highs. — A rate cut by the Federal Reserve may just be a matter of time, focusing on the further stimulating momentum of the Fed's rate cut and the weakening dollar on the liquidity of Hong Kong stocks. 1) Trump continues to exert political pressure on the Federal Reserve. 2) Significantly worse-than-expected employment data and a substantial downward revision of previous values provide a reasonable basis for the Fed to cut rates, with expectations for a rate cut by the Fed significantly rising. If subsequent inflation data remains mild, the Fed may start cutting rates in September or October.

In the short term, the Hong Kong stock market in August is experiencing fluctuations and differentiation, or in other words, is poised for action. The short-term market is more focused on mid-term report performance and cost-effectiveness, while US-China trade negotiations and fluctuations in US stocks may bring volatility and differentiation to Hong Kong stocks. Theme speculation may enter a period of declining risk appetite, with targets that have performance certainty being more favored. 1) Focus on mid-term report performance. Among the companies that released mid-term performance forecasts in the past month, 54.1% reported positive earnings surprises, with a higher proportion in the financial, materials, information technology, and consumer staples sectors. As of July 30, 2025, the forecasted net profit growth rate for Hong Kong Stock Connect constituent stocks in 2025 is 6.8%, basically unchanged from June; the net profit growth rate for the healthcare, materials, and industrial sectors in 2025 has increased compared to June. 2) Focus on cost-effectiveness. After a recent rebound, the forecasted PE of the Hang Seng Index has been restored to the median level since 2015, while the forecasted PE of the Hang Seng Technology Index remains below the 25th percentile level since July 2020. From a segmented industry perspective, the valuations of industries such as hotels, restaurants and leisure, biotechnology, textiles and luxury goods, software, and entertainment are still below the median level of the past decade.

3. Investment Opportunities: Select growth, high cost-effectiveness in the internet sector, new consumption, and innovative drugs to find alpha; optimize value, spreading from banks to non-banks, gold, and other stocks that exceed expectations in mid-term reports.

Technology Market: August is a good time to layout in the internet sector, and the AI-related industrial chain is still worth exploring. 1) The internet market is expected to rebound after the "bad news is fully priced in" during the mid-term performance period. With the deepening of policies against involution, especially the revised Anti-Unfair Competition Law of the People's Republic of China, which will take effect on October 15, 2025, the impact of involution on instant retail in the internet sector will ease. On one hand, the TMT sector, including the internet, has experienced a period of fluctuation and consolidation in the second quarter, and currently, valuations are reasonably low, making it highly cost-effective within the growth sector; On the other hand, AI technology is expected to achieve more breakthroughs in the second half of the year, and the internet is likely to shift from the narrative of "takeout competition" back to the narratives of AI and technological growth. 2) Continue to capitalize on the AI industry chain related to software and hardware, semiconductors, military technology, intelligent assisted driving, and consumer electronics.

New consumption trend: patiently seek alpha, valuations are not cheap, performance is key, and the mid-term report is the touchstone. This includes trendy toys, gold and jewelry, urban outdoor activities, new-style dining, domestic beauty and personal care, trendy discount retail, OTA, gaming, etc.

Innovative drug trend: still maintain a strategic bullish outlook, mid-term prosperity continues, but the short-term trend shifts from beta to alpha. After a significant rise in the past six months, the Hong Kong stock market for innovative drugs is crowded and faces potential significant profit-taking pressure. If there is volatility in the short term, it will be a better opportunity for entry; otherwise, there may be a lack of relative returns in the third quarter.

Value stock trend: 1) Dividend assets remain attractive to allocation-type funds. It is recommended to continue allocating high-quality, high-dividend central state-owned enterprises in sectors such as finance, telecommunications, public utilities, energy, resources, food and beverage, and real estate industry chain. 2) During the mid-term report season, pay attention to opportunities where performance may exceed expectations, and focus on high-quality leading companies in gold, brokerage firms, and traditional industries benefiting from "anti-competition." Among them, brokerage stocks are expected to show high growth in both mid-term and third-quarter reports and benefit from expectations of mergers and acquisitions; gold stocks are expected to welcome a new allocation window in August, as gold prices are likely to continue to reach new highs following six months of consolidation, with the warming expectations of the Federal Reserve's interest rate cuts, policy implementation, and a weakening dollar.

Risk warning: risks of great power competition, risks of U.S. monetary policy exceeding expectations, risks of global economic growth slowing more than expected