CMSC: Current Levels Present Strong Allocation Opportunity for Hang Seng Tech, Advises Buying on Dips and Holding Through Holiday

A recent research report from CMSC indicates that the Hong Kong stock technology sector, represented by the Hang Seng Tech Index, has experienced significant declines. Weak market conditions often foster pessimistic narratives, and following a brief liquidity shock, sentiment has become extremely negative across various fronts, from regulation to industry trends. The report asserts that the current level of the Hang Seng Tech Index offers substantial value for allocation.

Firstly, the recent market volatility is attributed to a sharp liquidity shock. Secondly, the current significant market fluctuations are, in essence, not vastly different from those seen in November 2025; there is nothing new under the sun. Finally, looking ahead, favorable factors are accumulating. The report recommends buying on dips and holding positions through the upcoming holiday.

The key viewpoints from CMSC are as follows:

Fundamentals: Economic data shows a slowdown in both the Production and New Orders components of the PMI, while prices continue to show strength. Structural issues related to insufficient domestic demand persist, and expanding domestic demand will remain a primary focus for policy measures. Concurrently, the PPI is expected to continue its recovery.

Liquidity and Capital Flows: The US Federal Reserve held rates steady in January, as expected, and a new Fed Chair nominee, Walsh, was put forward. Regarding capital flow data, both mainland and Hong Kong funds continued to increase their holdings in the Hong Kong stock market throughout January.

Valuation: The relative valuation of the Hong Kong technology sector has reached a historical low. Measuring the A-H premium for the tech sector using the Hang Seng Tech Index versus the A-share STAR 50 and ChiNext indices shows it is currently near extreme lows, previously seen in March 2022, October 2022 (during rapid foreign capital outflows), and late 2023 (amid gaming regulations). The current regulatory environment for internet companies and the economic development backdrop are significantly better than in 2022 and 2023. Against the backdrop of major AI advancements and a national focus on technological development, the Hong Kong tech sector appears significantly undervalued. Looking forward, the risk-reward ratio and probability of success for going long on Hong Kong tech stocks are both high.

Policy: Strict controls on IPO quality are expected to boost market sentiment to some extent, as excessive IPOs had previously become a consensus narrative explaining the weak performance of Hong Kong stocks.

Allocation Strategy: Focus on Technology (AI & Internet, High-End Manufacturing), Non-Bank Financials (Insurance), and High-Dividend (Red Chip) stocks.

AI & Internet: (1) The investment paradigm is shifting from an "arms race" to "profit verification," leading to a value discovery phase for Hong Kong-listed internet companies. (2) The Hong Kong market's AI ecosystem is becoming increasingly comprehensive, gradually forming a full industrial chain cluster covering computing hardware, foundational large models, and vertical scenario applications. (3) Losses in instant retail businesses are narrowing and are gradually being priced in by the market. (4) The discount on Hong Kong tech stocks is approaching historical extremes, and the Hang Seng Tech Index also offers a clear advantage for switching from high-valuation to low-valuation allocations.

Non-Bank Financials: This sector benefits from a "bullish stocks, bearish bonds" environment on the asset side, strong start-of-year sales on the liability side, and high operational leverage, making it a strong beta play.

High-Dividend Stocks: The Hang Seng High Dividend Yield Index offers a dividend yield of approximately 6%, with stable dividend-paying capabilities. Insurance capital and "fixed-income plus" strategies within southbound capital flows are increasing in scale and consistently allocating more to high-dividend assets.

Risk Warnings: 1) A shift in the US Federal Reserve's monetary policy. 2) Significant fluctuations in liquidity. 3) Black swan events.