CICC: Hong Kong Stock Operation Strategy Under Current Market Conditions

Compared to the impressive performance of A-shares since July, Hong Kong stocks appear somewhat "lonely," with the Hang Seng Index remaining stagnant around 25,000. In light of this situation, many investors are worried that A-shares have risen too quickly and are looking for opportunities in Hong Kong stocks, but they are also afraid that they will significantly underperform A-shares after moving to Hong Kong stocks. As September begins, market volatility has noticeably increased, and with the Federal Reserve's interest rate cuts "on the horizon," this doubt and choice have become "urgent."

Looking back at the market trends this year, it can generally be divided into three phases: 1) January to March, Hong Kong stocks outperformed, with AI-driven Hang Seng Tech being the undisputed winner; 2) April to June, U.S. stocks outperformed, although the Chinese market was also recovering after the reciprocal tariffs, U.S. stocks, especially tech giants, quickly reached new highs driven by better-than-expected earnings, while Hang Seng Tech has not been able to recover the highs from the end of March; 3) From July to now, A-shares have outperformed, with a liquidity-driven tech innovation trend allowing A-shares to quickly "catch up," while both Hong Kong and U.S. stocks have been fluctuating at high levels. It is not difficult to see that, to some extent, A-shares are catching up with the previously strong Hong Kong and U.S. stocks, with Hong Kong stocks being more fundamentally driven, and the recent lagging performance indicates limited fundamental catalysts.

Chart: Hong Kong stock performance since 2025

Note: Data as of August 31, 2025

Source: Bloomberg, CICC Research Department

Chart: Significant differences in market trends this year among Hong Kong stocks, A-shares, and U.S. stocks

Source: Wind, CICC Research Department

So, in the face of a market with significantly increased volatility and more divergent views, how should one choose between A-shares and Hong Kong stocks, and which industries have more investment value?

Why are Hong Kong stocks underperforming? Fundamentals (earnings downgrade), liquidity (Hibor rising), valuation (AH premium too low)

The recent underperformance of Hong Kong stocks is not surprising; as mentioned above, it is actually A-shares catching up with Hong Kong stocks. The recent underperformance aligns with our expectations and is mainly due to three factors: fundamentals (earnings downgrade), liquidity (Hibor rising), and valuation (AH premium too low).

► Fundamentals: The earnings growth rate of Hong Kong stocks has declined compared to 2024, and the full-year earnings forecast has been downgraded, in contrast to A-shares. From the disclosed interim results, Hong Kong stocks' net profit grew by 4.2% year-on-year in the first half of the year (non-financial +6.2%, financial +2.7%), better than A-shares' 2.8% (non-financial +4.2%, financial +1.5%). However, the difference lies in the direction; A-shares have significantly improved compared to -3.0% in 2024 (non-financial -14.2%, financial +9.0%), while Hong Kong stocks have noticeably slowed down from 9.2% in 2024 (non-financial +9.8%, financial +8.7%) Looking at the split, the non-financial revenue growth rate of Hong Kong stocks turned positive at 0.04% in the first half of the year, better than the decline of 1.7% in 2024, consistent with the macroeconomic environment in the first half of the year; although the profit margin continued to improve year-on-year by 0.3ppt to 5.7%, the improvement was not as significant as the 0.5ppt in 2024, resulting in a decline in profit growth rate in the first half compared to 2024.

Chart: Profit growth rate of Hong Kong stocks in the first half declines compared to 2024

Source: Wind, CICC Research Department

Chart: Year-on-year growth rate of non-financial revenue of Hong Kong stocks turns positive in the first half

Source: Wind, CICC Research Department

More importantly, looking ahead, the full-year profit expectations for Hong Kong stocks continue to be revised downwards, with the expected growth rate for 2025 turning negative; while the downward revision for A-shares is not significant, the growth rate for 2025 remains positive. The EPS growth expectation for the Hang Seng Index in 2025 has been continuously revised down during the recent earnings period, currently down to -2.7% (vs. 17.8% in 2024), which indicates that the second half may turn to negative growth. Although the profit downgrade of e-commerce leaders due to intensified competition in takeout is the main drag, over half of the companies within the Hang Seng Index have experienced varying degrees of downward revision, indicating that this is not an isolated phenomenon. In contrast, the earnings for the CSI 300 in 2025 have not been significantly revised down, with only a slight downward adjustment of 0.2% in the past month, and the expected annual growth rate of 6.9% remains higher than 2% in 2024.

Chart: EPS growth expectation for the Hang Seng Index turns negative in 2025

Source: FactSet, CICC Research Department

Chart: EPS growth for the CSI 300 index rises to 6.9% in 2025

Source: FactSet, CICC Research Department

The reasons for this contrast are: first, due to different bases and starting points, the profits of Hong Kong stocks have been continuously revised upwards since the end of last year and the beginning of this year, clearly earlier and stronger than A-shares, with the recent downward revision being a pullback from high levels; second, there are industry differences, with the downward revision in sectors such as software services, semiconductors, consumer services, and discretionary consumption being worse than A-shares, while pharmaceuticals and biotechnology, essential consumer retail, and healthcare are better than A-shares. But in any case, at least on the surface, this has formed a contrast in apparent growth rates with one positive and one negative, and a contrasting adjustment direction of one up and one down Chart: The current round of profit recovery in the Hong Kong stock market leads that of the A-share market

Source: FactSet, CICC Research Department

Chart 10: Since July, the adjustment of profit expectations for sectors such as software services, semiconductors, and consumer services in the Hong Kong stock market has been significantly worse than that of the A-share market

Source: FactSet, CICC Research Department

► Liquidity: Hibor has surged sharply, liquidity is tightening, which is contrary to the A-share market. Since mid-August, the Hong Kong Monetary Authority has been absorbing the supply of Hong Kong dollars from banks and continuously withdrawing liquidity, causing the Monetary Authority's balance to return to the level before the large-scale liquidity injection in early May. The non-linear changes after the liquidity withdrawal exceeded the threshold, combined with the amplification of potential carry trade reversals, have led to Hibor surging tenfold in the past two weeks, with the overnight Hibor rate once rising to 4.6%. Although the Hong Kong dollar has moved away from the weak side guarantee of 7.85 to 7.8, the Monetary Authority no longer needs to withdraw liquidity, and such a sharp rise in Hibor is unsustainable (it has now fallen to 2.5%), but it is also difficult to return to the extremely loose liquidity environment of early May.

Chart: Overnight Hibor rate once exceeded 4.6%

Source: Wind, CICC Research Department

Chart: The Hong Kong stock market is difficult to return to the previously extremely loose liquidity environment

Source: Bloomberg, CICC Research Department

This stands in stark contrast to the recent liquidity and trading activity in the A-share market. In July, M1 grew by 5.6% year-on-year, continuing to rise from 4.6% in June. This is not only due to the low base caused by last year's cleanup of manual interest compensation but also related to the activation of deposits. In July, non-bank deposits increased by 1.4 trillion yuan year-on-year, and the entry of deposits into stock accounts may be an important factor, as household savings decreased by 1.1 trillion yuan in July. Supported by this, the average daily trading volume of the A-share market has reached 2 trillion yuan since July, a 40% increase from 1.4 trillion yuan in the first half of the year.

► Valuation: The AH premium is too low, and after touching the "invisible bottom" of 125%, its attractiveness has decreased, but it has recently rebounded. Considering that individual and public investors in the mainland need to pay dividend tax (20% for H shares, up to 28% for red-chip stocks) when investing through the Hong Kong Stock Connect, when the AH premium converges to 125% (125%*0.8=1), there is no advantage for investors other than insurance to buy dividend assets in the Hong Kong stock market This has also led to the decline of the AH premium to below 125%, reducing the attractiveness of Hong Kong stocks for some investors, which is consistent with our previous indications.

Chart: After the AH premium reached the "invisible bottom" of 125%, Hong Kong stocks underperformed

Source: Wind, China International Capital Corporation Research Department

Who leads whom? Can A-shares spill over to Hong Kong stocks? How to choose? Hong Kong stocks lead A-shares; liquidity still favors A-shares, while Hong Kong stocks focus on economic structure

As we entered September, market volatility increased, and investor divergence also grew. On one hand, there are concerns that A-shares have risen too quickly, prompting a consideration to shift to Hong Kong stocks; on the other hand, there is worry that if A-shares continue to rise, allocating to Hong Kong stocks may underperform. So how to choose depends mainly on the following questions.

► Who leads whom? Hong Kong stocks lead; recently, A-shares are catching up with Hong Kong stocks. Since the end of last year, especially early this year, Hong Kong stocks have consistently led A-shares, supported by the rise in sectors such as dividends, technology internet, new consumption, and innovative pharmaceuticals, all backed by the fundamentals of their respective sectors. In a combination of "plenty of money" (abundant funds) but "low returns" (asset scarcity), funds essentially pursue "returns," whether through stable dividends or growth with structural highlights, most of which are found in the Hong Kong stock market. Similarly, the pace of upward revisions in Hong Kong stock earnings expectations began in early March, ahead of A-shares. In contrast, the A-share market lagged until July, when it significantly rose under liquidity-driven conditions after the AH premium had dropped to a multi-year low of 122%, to some extent catching up with the previous rise of Hong Kong stocks.

► Can the strength of A-shares in turn drive Hong Kong stocks? There is such a possibility, but this "filling the gap" type of spillover is more in the later stages in terms of time and overdrawn in terms of degree, as exemplified in April 2015, when the continuous rise of A-shares triggered a "catch-up" market for Hong Kong stocks, but the upward trend was essentially nearing its end in both time and degree.

Chart: The upward trend during spillover has basically entered its final stages in time and degree

Source: Wind, China International Capital Corporation Research Department

► How to choose between A-shares and Hong Kong stocks? Liquidity should still favor A-shares, while Hong Kong stocks should focus on economic structure.

1. If you choose to continue participating in liquidity-driven markets, then A-shares remain the best option, suitable for aggressive and trading-oriented investors. This type of market relies on continuous inflow of incremental funds and the formation of positive feedback with the market as a premise. If investors still firmly believe in this, then participating in A-shares is the most direct approach, rather than choosing Hong Kong stocks, which are influenced more indirectly and constrained by short selling and placements; 2) If investors are concerned about the sustainability of liquidity logic or worry about market overdraw, then Hong Kong stocks, especially their advantageous economic structure, are a more prudent choice, suitable for conservative and holding-type investors From the perspective of overall profitability and the macro environment, as the policy pull effect weakens and the base rises, if there is no incremental policy support, the macroeconomic growth rate in the fourth quarter may slow down, and the overall profitability of Hong Kong stocks is also expected to be under pressure. The current EPS growth expectation for the Hang Seng Index in 2025 is -2.7%, implying that the profit growth in the second half of the year may turn negative. The rising expectations of the Federal Reserve's interest rate cuts may temporarily improve the liquidity of Hong Kong stocks, but cannot serve as a single and absolute dominant factor. The fluctuations of Hong Kong stocks during the Federal Reserve's interest rate cut cycle in 2019 and the corrections in 2024 indicate that interest rate cuts cannot surpass domestic fundamental factors.

Chart: The rising expectations of the Federal Reserve's interest rate cuts are expected to temporarily improve the liquidity of Hong Kong stocks, but it is difficult to change the overall allocation pattern.

Source: Wind, CICC Research Department

In the past few months, we have maintained our judgment on the Hong Kong stock index at a benchmark of 24,000 and an optimistic range of 25,000-26,000, and the market has not formed an "effective breakthrough." We maintain this judgment and have not significantly raised the index level because, from both the overall and structural perspectives, the upward momentum of the index still requires certain "conditions," either overall profit recovery or cooperation from the internet sector:

► Overall Method: The profit expectations for Hong Kong stocks have been revised down, requiring valuation support, but the risk premium remains relatively low. The central point of the Hang Seng Index may still be around 24,000. According to the dynamic weighting of Chinese and U.S. bonds (dynamically adjusted based on the proportion of southbound trading, currently around 35%-40%), the current risk premium of the Hang Seng Index after dynamic weighting is 5.5%, lower than the historical lows since last October, and is actually at a new low since the market highs in early 2018. If we use the 6% that has been tested multiple times since 2018 as the lower limit, the Hang Seng Index level is around 24,000. Looking back, this method has been very reliable in its judgments during the sharp declines in September last year, early this year during DeepSeek, and the "reciprocal tariffs."

Chart: Under the benchmark scenario, the Hang Seng Index level is around 24,000.

Source: Bloomberg, CICC Research Department

► Structural Method: The effective breakthrough of the Hang Seng Index requires cooperation from the internet sector. The flaw of the overall method is that it cannot depict the structural market of Hong Kong stocks this year. By further breaking down the risk premiums of major sectors, we can observe differences in structural drivers. Breaking it down, the index peak at the end of March was mainly driven by the internet sector, while the current index peak is more driven by the financial cycle and new consumption innovative drugs. Currently, the risk premiums of the financial cycle, new consumption, and innovative drug sectors are all below the levels at the peak of housing prices in 2021 and after the optimization of control measures at the end of 2022. The subsequent upward momentum may come from the emotional recovery of the internet sector. If the risk premium of the internet sector falls back to the level of late March, it could push the Hang Seng Index to stabilize above 26,000 points Chart: If the technology narrative strengthens, it may support the Hang Seng Index to rise to 26,000

Source: FactSet, CICC Research Department

In our calculations of the Hang Seng Index level above, the risk-free rate uses the current proportion of southbound trading to weight the Chinese bonds and US Treasury bonds. However, some may question whether this weight distribution is reasonable. If we adjust the weight of Chinese bonds and US Treasury bonds in the risk-free rate along this line of thought, we can calculate the potential "upper and lower limits" of the index in a static environment (assuming that profits and the risk-free rate do not change significantly): 1) Considering the potential for an increase in the southbound trading proportion, if we assume the southbound proportion increases from around 35% to 50%, with Chinese bonds and US Treasury bonds weighted equally, it corresponds to a Hang Seng Index level of 26,000, which is basically consistent with our optimistic scenario. 2) If we conduct a more extreme extrapolation, further increasing the proportion of Chinese bonds to 100%, it corresponds to a Hang Seng Index of 30,000 points; conversely, if we reduce the pricing proportion of Chinese bonds to 0%, it corresponds to a Hang Seng Index of 22,500. A 100% Chinese bond pricing (30,000 points) or a 100% US Treasury bond pricing (22,500 points) is obviously unrealistic in reality, but its significance is to provide a reference for the "upper and lower limits" due to pricing power discrepancies in a static environment.

Chart: Calculating the "upper and lower limits" of Hong Kong stock levels based on different risk-free rate weighting assumptions

Source: Wind, Bloomberg, CICC Research Department

Industry Allocation Ideas: Focus on prosperity direction, supplemented by Sino-US mapping; innovative drugs, technology hardware, non-ferrous metals, non-bank financials, consumer electronics, etc., have relatively high prosperity

A prominent feature of the Hong Kong stock market this year is that structure outweighs the index, with main lines constantly rotating. In the absence of significant momentum for fundamentals and index upward movement, investors should grasp the structural advantages of Hong Kong stocks, focusing on the prosperity direction dominated by profit trends, while also supplementing with certain Sino-US mapping themes.

► Profit certainty and prosperity direction: Pharmaceuticals, technology hardware, non-ferrous metals, non-bank financials, consumer electronics, and some new consumption and automotive parts have high profit certainty. With profit expectations for Hong Kong stocks under pressure and insufficient upward momentum for the index, structural opportunities become more prominent, and industries with relatively certain profit growth prospects are worth paying attention to. We characterize industry prosperity from two aspects:

1. Expected profit growth rates and adjustment situations: Biotechnology (+138%), technology hardware (+45%), materials (+38%), diversified finance (+28%), and other sectors have high expected profit growth rates for 2025. These sectors have also seen significant upward revisions in profits since the beginning of the year, with biotechnology, diversified finance, technology hardware, and materials seeing expected profit revisions of 86%, 30%, 29%, and 15% for 2025, respectively Chart: Upward adjustment of profit expectations and high growth rates in pharmaceuticals, technology hardware, etc.

Source: FactSet, CICC Research Department

1. ROE Expectations: As of the end of June, the overall ROE expectations for the MSCI China Index have slightly declined, with ROE expectations for consumer services, software services, and retail sectors turning downward. The semiconductor and real estate sectors continue to decline, while the ROE expectations for media entertainment and durable consumption remain largely unchanged. However, the ROE expectations for non-bank, non-ferrous, innovative pharmaceuticals, technology hardware, consumer electronics, new consumption, and automotive and parts sectors have further increased. Considering both the comprehensive profit growth expectations and adjustments, as well as ROE expectations, the pharmaceuticals, technology hardware, non-ferrous, and non-bank sectors show high prosperity.

Chart: Upward revision of ROE expectations for non-bank, non-ferrous, innovative pharmaceuticals, technology hardware, consumer electronics, new consumption, automotive and parts

Source: FactSet, CICC Research Department

► US-China mapping thematic opportunities: computing power, robotics, Apple supply chain, and other technology narratives; traditional demand driven by interest rate cuts such as the real estate chain (home appliances, furniture, home goods), investment chain (non-ferrous, machinery, etc.). In a market environment dominated by liquidity and sentiment, if domestic fundamentals and policies cannot provide more support, then overseas demand and mapping chains are also a configuration idea, including two aspects: 1) Technology chain, including computing power mapped by overseas AI technology leaders, robotics mapped by Tesla's R&D and production of Optimus, and other technology narratives in the Apple supply chain. 2) Real estate and investment chains driven by the Federal Reserve's interest rate cuts: The Fed's interest rate cuts will boost the currently weak demand in the US real estate and traditional manufacturing sectors. The post-cycle sectors driven by real estate demand, such as home appliances, furniture, and home goods, as well as certain commodities driven by investment demand in non-ferrous, may be the directly benefited directions.

Therefore, unless there is a trend change in the current macro or credit cycle environment, structural strength over the index will remain a prominent feature of the Hong Kong stock market. If speculating on short-term liquidity trends, small-cap stocks and the Hang Seng Tech Index may have opportunities. However, based on fundamental logic, under pressure on profit expectations, configurations should consider profit certainty and US-China mapping opportunities. In summary, the pharmaceuticals, technology hardware, non-ferrous, non-bank, and consumer electronics sectors show high prosperity. However, the long-term correct structural direction should also be bought at the right position, choosing appropriate entry points based on our congestion indicators.

Chart: Current congestion levels in banks, internet, and new consumption are not high

Source: Wind, CICC Research Department

Authors: Liu Gang, Wang Muyao, Source: CICC Insights, Original Title: "Hong Kong Stock Operation Strategy Under Current Market Conditions" published on September 7, 2025

Risk Warning and Disclaimer

The market has risks, and investment requires caution. 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