CITIC Securities Co., Ltd.: How does the Federal Reserve's interest rate cut affect the Hong Kong stock market?

According to the Zhitong Finance APP, CITIC Securities has released a research report stating that the expectation of a preventive interest rate cut by the Federal Reserve in September has strengthened, highlighting the core asset allocation value of Hong Kong stocks. The report indicates that the short-term boosting effect of the Federal Reserve's interest rate cuts on Hong Kong stocks has been significant, and in terms of trends, except for the special circumstances in 2019 and 2020, Hong Kong stocks have generally performed well in the short term after rate cuts. The medium to long-term outlook depends on whether the rate cuts effectively broaden China's policy operational space. Looking ahead to this round, the report expects it to still be a preventive interest rate cut, as U.S. employment is cooling but economic resilience remains, with rate cuts aimed at addressing potential risks. In the short term, growth sectors such as technology, discretionary consumption, and pharmaceuticals are expected to benefit. In the medium to long term, if China's policies align with synchronized easing between China and the U.S., it may lead to an influx of foreign capital into Hong Kong stocks. Currently, there is ample room for foreign capital allocation, and against the backdrop of China's stable growth policies being implemented and the fundamentals bottoming out, the core asset allocation value of Hong Kong stocks is highlighted.

CITIC Securities' main viewpoints are as follows:

As the September Federal Reserve meeting approaches, the market is increasingly focused on the potential impacts of interest rate cut trades.

At the Jackson Hole meeting in August 2025, Jerome Powell made dovish remarks, emphasizing that the current risk balance changes require an adjustment in policy stance, and the downside risks in the labor market are increasing. The market interpreted this as a signal for an early interest rate cut by the Federal Reserve. Additionally, the number of new non-farm jobs in the U.S. in August was significantly lower than expected, with the unemployment rate rising from 4.248% in July to 4.324%. Data such as ADP and PMI employment components showed a comprehensive weakening, indicating a continued downward trend in the labor market. As of September 12, CME data showed that the market expected a 25bps/50bps rate cut in September with probabilities of 89% and 11%, respectively, while the market generally anticipates 2-3 rate cuts by the Federal Reserve in 2025.

The impact of the Federal Reserve's interest rate cuts on the liquidity of the Hong Kong stock market—foreign capital inflow is not guaranteed.

Reviewing the nine interest rate cut cycles since 1984, the report categorizes them into four accommodative cuts and five preventive cuts. Except for the rapid recovery from the impact of the COVID-19 pandemic in 2020, the average cut in the other three accommodative cycles was 577bps, lasting about 28 months; while in the case of preventive cuts, except for the 1984 cycle, the other four rounds had three cuts each (averaging 77bps), lasting about one quarter. The flow of foreign capital into China and emerging markets generally shows a pattern of "inflow before rate cuts, uncertain during the cycle, and re-inflow after the end." Specifically for Hong Kong stocks, there are differences in the effects of the two types of rate cuts:

1. Under preventive rate cuts, the U.S. economic fundamentals still exhibit resilience, and the positive economic outlook supports the dollar, significantly suppressing the depreciation pressure of the dollar that may arise from liquidity easing, leading to no further inflow of foreign capital into China (for example, after the September 2024 rate cut, foreign capital inflow into Hong Kong stocks did not fully recover);

2. In the case of accommodative rate cuts, short-term inflows into Hong Kong stocks may occur due to weakening U.S. economic conditions and expectations of a weaker dollar, but long-term outflows may be influenced by a decline in global risk appetite (for example, after the 2007 rate cut, funds initially flowed in and then out).

The impact of the Federal Reserve's interest rate cuts on the trend of Hong Kong stocks—driving short-term market increases, with long-term returns to fundamentals. The short-term boosting effect of the Federal Reserve's interest rate cuts on Hong Kong stocks is significant. Except for the special circumstances in 2019 and 2020, most cycles have pushed Hong Kong stocks upward in the short term, and different types of interest rate cuts show distinct characteristics. In the case of accommodative rate cuts, the performance of Hong Kong stocks has shown a phased synchronization with foreign capital flows: in the early stages of rate cuts in 2001 and 2007, the market rose with the easing of liquidity, but due to weakening economic fundamentals, it faced downward pressure from profit expectations in the mid-term, rebounding gradually after economic stabilization; in 2020, however, the rate cut exceeded expectations, triggering risk panic, leading to a short-term withdrawal of foreign capital and a decline in Hong Kong stocks. Under preventive rate cuts, the trend of Hong Kong stocks often diverges from foreign capital flows, with the core driving force being that rate cuts broaden China's policy maneuvering space: during the Asian financial crisis in 1998, the Federal Reserve's rate cuts created a favorable environment for Hong Kong's financial defense; in 2024, the direct impact of the Federal Reserve's rate cuts is limited, and the policy combination in China on September 24 became the key engine for the rise of Hong Kong stocks.

It is expected that this round will still be a preventive rate cut, and we are optimistic about the core assets of Hong Kong stocks.

This round of Federal Reserve rate cuts is likely to continue the preventive characteristics. Although there are signs of cooling in the U.S. job market, economic resilience remains (the unemployment rate is still at a historical low, inflation is falling, and long-term expectations are stable, with stable GDP growth in the first half of the year). The essence of rate cuts is to respond to potential risks, aiming to avoid an economic slide into recession. In the short term, during historical preventive rate cut cycles, liquidity easing is expected to provide marginal support to Hong Kong stocks, with sectors such as technology, discretionary consumption, and pharmaceuticals performing better. In the medium to long term, the core driving force lies in the opening of policy space in China. If the Federal Reserve's rate cuts are paired with China's proactive fiscal and monetary policies, it will initiate the first synchronized easing between China and the U.S. since 2021, potentially bringing in foreign capital to Hong Kong stocks. EPFR data shows that since August, active foreign capital has continuously flowed into China, marking the first long-term capital return since last year's "924," with significant increases in allocations from Europe and South Korea. As of July, the proportion of active foreign capital allocated to Chinese assets was only 7.0%, which is still under-allocated by 6.1 percentage points compared to the global market value of Chinese assets. With the implementation of China's stable growth policies and the bottoming out of fundamentals, there is ample room for foreign capital allocation.

Risk factors:

Increased friction in technology, trade, and finance; overseas central bank monetary easing lower than expected; risks of macroeconomic fluctuations in the U.S.; risks of adjustments to export controls and tariff policies in the U.S. and other related countries exceeding expectations; spread of geopolitical conflicts