Following a prolonged period of weakness since late June, the Hong Kong stock market appears to be signaling a potential bottom and recovery.
On July 8th, defying the lackluster performance of mainland A-shares and the Nasdaq the previous day, the Hong Kong market unexpectedly strengthened, accelerating its gains in the afternoon session.
The Hang Seng Index surged 2.99%, the Hang Seng Tech Index jumped 4.97%, and the Hang Seng China Enterprises Index rose 4.04%.
Technology and internet stocks led the charge, with Alibaba Group Holding Ltd, Kuaishou Technology, Xiaomi Corp, Tencent Holdings Ltd, Baidu Inc, and JD.com Inc all trading in positive territory.
From its late-June low, the Hang Seng Tech Index has now rebounded more than 8%.
As of the close on July 8th, the Hang Seng Tech ETF (513180), which tracks this index, has climbed 11.34% from its bottom.
This recovery phase is not merely a technical bounce; it is underpinned by concrete fundamental logic.
Opportunity Born from Decline: Valuations at Historical Lows
The fundamental premise for this rally in Hong Kong stocks is, quite simply, that prices had fallen sufficiently.
Since the peak in October of last year, the Hang Seng Tech Index had corrected by more than 30%, with the internet sector falling over 40%.
Some leading stocks even retreated to levels seen before the market upturn that began on September 24, 2024.
By the end of June, the rolling price-to-earnings (PE) ratio of the Hang Seng Tech Index was only about 22 times, placing it around the 23rd percentile historically since the index's inception—meaning it was cheaper than it had been roughly three-quarters of the time.
The valuation for an index tracking Hong Kong internet stocks is even more striking, with a trailing-twelve-month (TTM) PE of just over 18 times, sitting at an extremely low percentile of less than 5% over the past year.
When an index becomes cheaper than it was 95% of the time in its history, that in itself constitutes a powerful rationale for a potential upswing.
The AI Narrative Shift: The Catalyst for the Rally
If valuation is the foundation, the shift in the Artificial Intelligence (AI) narrative is the catalyst that ignited the rally.
Over the past six months, the market had largely categorized Hong Kong's internet giants as "cost bearers" in the AI era—viewing them as entities that would need to spend heavily on computing power and infrastructure, thereby dragging down profits.
However, a series of significant AI developments since June is reshaping this market perception.
Tencent Holdings Ltd, on July 6th, launched its new-generation large language model, Hunyuan Hy3, whose performance in smaller models rivals flagship products with 2 to 5 times the parameters, offering high cost-effectiveness.
Meituan open-sourced its trillion-parameter model, LongCat-2.0, in late June, marking the industry's first trillion-scale model trained entirely on domestic computing resources.
Kuaishou Technology's AI unit, Kling AI, secured a $3 billion financing round, achieving a post-money valuation of $18 billion, setting a global record for video model funding.
AI-related annualized recurring revenue (ARR) for Alibaba Group Holding Ltd's cloud division has surpassed 35 billion yuan, exceeding 30% of its external revenue for the first time.
Furthermore, Zhipu AI's GLM-5.2 model has entered the global top three.
These developments underscore a key point: Hong Kong's internet giants are not merely "burning cash on AI." They possess proprietary models, application scenarios, and massive user bases.
AI is transitioning from a cost center to a potential profit driver.
The market is beginning to reprice these companies as "AI beneficiaries" rather than "AI consumers."
Confluence of Liquidity and Policy Support
Concurrently, market liquidity conditions are showing marginal improvement.
In Hong Kong, the central bank governor explicitly stated that the country's foreign exchange reserves will continue to increase their asset allocation proportion in Hong Kong—effectively providing a reassurance of long-term capital support for the market.
Southbound capital flows through Stock Connect are also accelerating their return, with cumulative net purchases exceeding HK$320 billion year-to-date.
Compared to the mainland A-share market, Hong Kong stocks are more sensitive to overseas macro sentiment.
Previously, expectations that the U.S. Federal Reserve would pause rate cuts or even resume hikes exerted pressure on the Hong Kong market.
Latest data shows U.S. non-farm payrolls increased by only 57,000 in June, significantly below the market expectation of 110,000, leading to a temporary ebb in rate hike fears.
Morgan Stanley even forecasts that the Fed will not hike rates in 2026 and may enter a rate-cutting cycle in the first half of 2027.
This scenario is relatively favorable for offshore assets like Hong Kong stocks.
Additionally, the previously extreme level of short positioning has also accelerated the rebound.
Short covering combined with new long positions has created a short-term upward effect.
Investing in the Hong Kong Tech Sector: Focus on These Two ETFs
In summary, the Hong Kong technology sector is currently in a window characterized by "valuation repair leading, followed by fundamental validation."
For investors looking to participate in this recovery, Exchange-Traded Funds (ETFs) offer an efficient vehicle, with two products warranting particular attention.
The Hong Kong Stock Connect Technology ETF (159850) tracks the China Securities Hong Kong Stock Connect Technology Index, offering broader coverage.
It includes internet leaders like Tencent Holdings Ltd, Alibaba Group Holding Ltd, and Meituan, as well as hard-tech names such as SMIC and Hua Hong Semiconductor, innovative pharmaceutical firms like BeiGene Ltd and Innovent Biologics, and new energy leaders including BYD Company Ltd.
It is suitable for investors bullish on the entire Hong Kong tech spectrum who seek a "one-stop" allocation across AI, semiconductors, and innovative pharmaceuticals.
The Hong Kong Stock Connect Internet ETF (520910) tracks the CSI Hong Kong Stock Connect Internet Index, with a sharper focus on the internet platform economy.
Its core holdings are concentrated in leading companies like Tencent Holdings Ltd, Alibaba Group Holding Ltd, Xiaomi Corp, Meituan, and Kuaishou Technology.
A key highlight of this product is its high exposure to AI applications, as the constituent internet giants are precisely the core beneficiaries of AI commercialization.
Its current PE ratio is just over 18 times, at an extremely low percentile over the past year, offering ample valuation margin of safety.
Regarding strategy, given the potential for ongoing market volatility, a dollar-cost averaging or phased entry approach is recommended to gradually accumulate positions at lower levels, awaiting a potential "Davis Double Play" driven by earnings realization from AI applications.
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