China Galaxy Securities has released a research report stating that the market had previously been trading on expectations that new Federal Reserve Chair Kevin Warsh might adopt a dovish stance. However, this week's reality has shattered that expectation. Even before Warsh has been officially sworn in, the bond market has already tightened financial conditions preemptively by pushing yields higher, a move the market is interpreting as "front-running" a rate hike. Vincent Ahn has characterized this as a "modern version of bond vigilantes." Nevertheless, the market also holds the potential to front-run expectations for monetary easing, with the second half of the year (July-August) being a critical observation window.
The firm points out that investment strategy should focus on three main themes: the technology sector; high-dividend/yield assets (for defensive positioning); and the innovative drug sector. The main views of China Galaxy Securities are as follows:
**Hong Kong Market Performance:** For the week (May 11 to May 15), most major global broad-based indices declined, with the exceptions being the ChiNext Index, Thailand's SET Index, the Ho Chi Minh Index, and the S&P 500. All three major Hong Kong stock indices fell: the Hang Seng Index dropped 1.63%, the Hang Seng Tech Index fell 3.17%, and the Hang Seng China Enterprises Index declined 2.23%.
Among Hong Kong's primary sectors, the overall market faced pressure this week, with 2 sectors rising and 9 sectors falling. Utilities gained 0.49%, Energy rose 0.18%, while Materials plunged 8.59%, Healthcare fell 4.23%, Consumer Staples dropped 3.42%, and Consumer Discretionary declined 1.39%. Looking at secondary sectors, Semiconductors, Household Appliances II, and Electrical Equipment led the gains this week, while Nonferrous Metals, Household Products, and Consumer Durables led the declines.
**Hong Kong Market Liquidity:** (1) The average daily turnover on the Hong Kong Exchange this week was HKD 202.35 billion, an increase of HKD 52.988 billion from the previous week. The average daily short-selling amount was HKD 32.028 billion, up HKD 389 million week-over-week. The average daily short-selling ratio as a percentage of turnover was 10.99%, a decrease of 2.78 percentage points from the previous week. (2) Southbound capital recorded a cumulative net inflow of HKD 9.333 billion this week, an increase of HKD 9.526 billion in net inflow compared to the previous week. (3) In the seven days up to May 13, among Hong Kong-listed Chinese stocks, global active foreign funds saw a net outflow of USD 419 million, while global passive foreign funds saw a net inflow of USD 939 million. These figures represent a decrease of USD 461 million and an increase of USD 1.316 billion in net inflows, respectively, compared to the previous week.
**Hong Kong Market Valuation and Risk Appetite:** (1) As of May 15, 2026, the PE and PB ratios of the Hang Seng Index were 12.31x and 1.23x, respectively, placing them at the 80th and 56th percentile levels since 2010. (2) As of May 15, 2026, the yield on the 10-year US Treasury note rose 21 basis points from last Friday to 4.59%. The risk premium for the Hang Seng Index stood at 3.54%, which is -1.70 standard deviations below its 3-year rolling average, placing it at the 2nd percentile level since 2010.
**Fed Leadership Transition: Is Hong Kong Tech Now More Attractive?** The market had previously been trading on expectations that new Federal Reserve Chair Kevin Warsh might adopt a dovish stance. However, this week's reality has shattered that expectation. Even before Warsh has been officially sworn in, the bond market has already tightened financial conditions preemptively by pushing yields higher. In the face of the objective reality of high inflation data, even if Warsh intends to promote rate cuts, it will be difficult for him to gain support within a Fed where hawkish voices are growing louder. Simultaneously, outgoing Chair Powell's final remarks before stepping down leaned "hawkish," pushing market expectations for a rate cut within the year to a freezing point.
Nevertheless, the market also holds the potential to front-run expectations for monetary easing, with the second half of the year (July-August) being a critical observation window.
Investment strategy should focus on three main themes: **(1) Technology Sector.** The technology industry trend has high certainty and is the core driver of this market cycle. Following the recent short-term correction, valuations in some segments have become more attractive. Memory chips have entered a super-cycle due to explosive AI demand, with a clear price increase trend. Meanwhile, the power equipment sector benefits from domestic grid investment and overseas market expansion. It is recommended to focus on semiconductors/hardware equipment, memory chips, and power equipment. **(2) High-Dividend/Yield Assets (Defensive Positioning).** The recovery in China's April PPI data is favorable for the profit expectations of pro-cyclical sectors like energy and raw materials. It is recommended to focus on utilities and communication services. **(3) Innovative Drug Sector.** The globally anticipated ASCO oncology conference is imminent, serving as a significant catalyst for pharmaceutical stock prices.
**Risk Warnings:** Risks of domestic policy strength and effectiveness falling short of expectations; risks of overseas interest rate cuts falling short of expectations; risks of unstable market sentiment.
Comments