After a one-sided rally in September, Hong Kong stocks have experienced volatility since October due to shifting overseas macro expectations. Currently, both A-shares and H-shares are completing mid-term adjustments, with some high-quality Hong Kong assets re-entering attractive valuation ranges. Supported by sustained northbound capital inflows, earnings recovery expectations, and improving year-end macro conditions, Hong Kong stocks are presenting a notable year-end trading opportunity.
**Key Factors Behind Recent Adjustments** 1. **U.S.-China Tensions**: Market risk appetite was dampened by strategic competition, notably in rare earths, triggering capital outflows from Hong Kong’s tech-heavy indices. 2. **Fluctuating Liquidity Expectations**: Fed rate-cut projections swung between optimism and caution, driving periodic USD strength and market instability. 3. **Sector Rotation**: After concentrated gains in AI and tech sectors in Q3, funds shifted toward defensive high-dividend plays in Q4 amid profit-taking and risk aversion.
**Cyclical Positioning** - **Liquidity Cycle**: Global easing, led by major central banks since mid-2023, remains supportive, though Fed divisions suggest cautious moves ahead. - **Valuations**: After a three-year bear market, key indices like the Hang Seng now trade at mid-to-upper historical valuation percentiles (PE: 10–11x). - **Earnings Recovery**: Early-stage rebound, led by select sectors, faces a gradual slope due to muted domestic consumption and investment momentum.
**Catalysts for the Current Window** 1. **Attractive Valuations**: Post-adjustment, core tech and consumer stocks offer compelling entry points. 2. **Liquidity Tailwinds**: Record southbound inflows (HKD 1.4 trillion year-to-date) may converge with renewed overseas liquidity optimism. 3. **Macro Improvements**: Rising CPI (+0.7% YoY in November) and export growth (+5.7% MoM) signal recovery, broadening earnings upside. 4. **Geopolitical Calm**: U.S. policy shifts hint at reduced tensions, while China’s pro-consumption policies bolster domestic demand.
**Sector Strategy** - **Dividends**: Focus on sustainable payers with stable earnings and margin of safety as rising rates dilute defensive appeal. - **Growth Rebound**: Oversold internet, biotech (notably innovation drugs with policy tailwinds), and niche consumer sectors (e.g., collectibles) may lead the next rally.
**Risks**: Escalating U.S.-China frictions, Fed policy surprises, or weaker-than-expected China recovery could disrupt the rebound.
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