An analysis report has been released, highlighting three key pressures behind the Hong Kong stock market's significant underperformance relative to other Asian markets since 2026. On the fundamental earnings side, there has been a concentrated downward revision in the profits of heavyweight stocks. Profit expectations for sectors like internet platforms and the automotive supply chain have been substantially lowered, and upward revisions for hard-tech companies have been insufficient to offset this. On the valuation side, the US dollar and US Treasury yields have imposed a dual constraint on the offshore market, leading to sustained foreign capital outflows. At the micro-trading level, the third quarter faces liquidity supply disruptions from IPOs and share lock-up expiries. There is optimism regarding the medium- to long-term global appeal of renminbi-denominated assets, which translates to stronger confidence in Hong Kong stocks. However, for the Hong Kong market to shift from underperformance to strength, three conditions need to align: ① an improvement in the global liquidity environment; ② a halt to the downward revision of earnings expectations; and ③ a weakening of micro-level supply-side disruptions. If only one of these three pressures eases, the market is more likely to experience a valuation repair or a short-term rebound. If two begin to reverse, the market gains a foundation for repricing. If all three align, Hong Kong stocks could transition from being a discounted offshore asset to a trend-following allocation asset. The main points of the analysis are as follows:
Primary Factors for Underperformance: A Dual Weakening in Liquidity and Corporate Earnings
Since 2026, global emerging market equity performance has shown extreme divergence, with Hong Kong stocks relatively underperforming. As of June 10th, South Korea's KOSPI has risen 83.45%, China's STAR 50 Index has risen 21.50%, while the Hang Seng Index has fallen 5.60%, the Hang Seng Tech Index has dropped 15.30%, and Indonesia's Composite Index has declined 31.14%. The movement in risk assets has not been uniform; a clear logical thread explains the divergence: the higher the weighting of AI hardware-related components, the stronger the performance. AI hardware-related stocks constitute 66.8% of the KOSPI's market capitalization, 39.1% of the Nikkei 225, and 78.3% of the STAR 50 Index. In contrast, the Hang Seng Tech Index has only a 14.48% weighting in AI hardware, the Hang Seng Index merely 2.35%, the Shanghai Composite Index 3.70%, and indices for Brazil, Mexico, Vietnam, and Indonesia are essentially 0%. At the fundamental earnings level, which is the most critical reason: currently, Hong Kong's tech stocks are still predominantly application-focused, and AI's contribution to earnings is not yet significant. Looking further, the Hang Seng Tech and Hong Kong internet stocks are not pure tech assets; in the offshore market environment, they more closely resemble high-volatility assets, with price movements often influenced simultaneously by industry narratives, earnings expectations, US dollar liquidity, and passive fund rebalancing. When the pricing focus of the AI industry chain shifts from application potential to hardware profit realization, and Hong Kong indices lack high-weight AI hardware components, the momentum previously driven by risk appetite is more prone to turning into a pullback.
On the valuation side, the obvious factor is capital: foreign funds have been continuously flowing out of the Hong Kong market, and support from southbound Stock Connect flows has also significantly weakened. This year, foreign investors have persistently reduced their holdings in Hong Kong stocks. Against a backdrop of a fluctuating but strengthening US dollar and a contraction in global risk appetite, downward revisions in earnings expectations have reduced the valuation attractiveness for foreign capital. Geopolitical disturbances, combined with Hong Kong's unique pricing mechanism, have led some foreign funds to reallocate their holdings to other emerging markets. Simultaneously, the incremental support from Stock Connect southbound flows for Hong Kong stocks has notably weakened, with the total net inflow this year significantly lower than the same period in 2024. Hong Kong stocks are not a mandatory asset for either mainland or overseas capital but rather a portfolio enhancement tool. Once US dollar liquidity tightens or improvements in earnings are insufficiently validated, incremental capital can quickly pivot to other markets with higher certainty.
Index Weakness: Concentrated Earnings Downgrades for Heavyweights
Beyond a relatively low hard-tech content, the concentrated downward revision of earnings for heavyweight stocks is an inevitable factor in the weakness of Hong Kong indices. The low AI hardware content is intuitively reflected in relatively weaker earnings expectations compared to other emerging economies. According to Wind consensus estimates, the aggregate 2026 profit forecast for Hang Seng Tech Index constituents has dropped from approximately 7 trillion yuan in January this year to about 6 trillion yuan currently. In the same period, earnings expectations for major South Korean and Japanese indices were significantly revised upwards, forming a stark contrast with Hong Kong. The impact of earnings downgrades for heavyweight stocks on the index's profit expectations is particularly pronounced. Hong Kong indices are highly concentrated, with a few internet platform and automotive supply chain companies contributing enormously to the index. This year, the downward revisions for 2026 performance for these types of companies have been substantial. Although hard-tech companies have provided some earnings support, it has not matched the magnitude of the downgrades for internet and automotive companies. In reality, there are structural opportunities within the Hong Kong market, but the index level is more heavily dragged down by key sectors. This industry divergence directly reflects the shift between old and new economic drivers in China: raw materials and some resource products benefit from global supply constraints and price resilience, while information technology, telecommunications, and internet platforms rely more on the recovery of demand in areas like advertising, cloud services, AI applications, local services, and consumer services, the pace of which remains to be validated.
Capital Outflows Under a Triple Constraint
As an offshore market, Hong Kong is one of the most liquidity-sensitive markets globally. The average daily trading volume for A-shares is typically between 2 to 3 trillion yuan, while for Hong Kong it is only 2 to 3 hundred billion Hong Kong dollars. The significant liquidity difference between A-shares and H-shares further affects individual stock pricing efficiency. Explaining Hong Kong's market cannot start solely from cheap valuations; one must first assess whether global liquidity is sufficient to support a low-valuation recovery. In a liquidity-scarce offshore market, assets being inadequately priced is the norm. When fundamentals show marginal improvement, they are easily extrapolated linearly, leading to overvaluation; when they show marginal deterioration, they are prone to concentrated selling pressure, pushing valuations very low.
The first liquidity constraint stems from the rising US dollar. This year, the US Dollar Index has fluctuated within a range of 95 to 105, trending upwards and imposing sustained pressure on Hong Kong stocks. Historical experience shows that Hong Kong stocks typically perform weakly during US dollar appreciation phases, as a stronger dollar often corresponds with global liquidity tightening, capital outflows from emerging markets, and valuation pressure on risk assets.
The second liquidity constraint comes from high US Treasury yields. The upward trend in the 10-year US Treasury yield this year transmits to Hong Kong stocks through three channels. First, high interest rates suppress the valuation of companies with distant cash flows, such as internet platforms, innovative pharmaceuticals, software services, and new energy vehicles. Second, high US Treasury yields increase the risk-free return of US dollar assets, leading global capital to demand a higher risk premium for offshore risk assets like Hong Kong stocks. Third, high US Treasury yields often accompany a stronger US dollar, making it more difficult for capital to flow back to emerging markets. Particularly since February this year, with repeated tensions in US-Iran relations, significant volatility in oil and gold prices, and a simultaneous rise in US Treasury yields, the resonance among these three asset classes reflects a short-term repricing of market expectations for global liquidity. Rising oil prices suggest inflation pressures may recur, rising gold indicates increased safe-haven demand, and rising Treasury yields signal a delay in interest rate cut expectations—all three signals are unfavorable for the valuation repair of offshore risk assets. The rebounds in Hong Kong stocks in 2009, 2019, and 2020 all occurred against a backdrop of easing global liquidity.
The third liquidity constraint is the appreciation of the renminbi. The periodic strengthening of the renminbi further dilutes the real returns for mainland investors, which is one reason for the marginal slowdown in southbound capital flows. Measured in Hong Kong dollars, the Hang Seng Index and Hang Seng Tech Index have fallen 4.77% and 14.34% year-to-date, respectively. When measured in renminbi, the declines widen to 8.34% and 17.56%, respectively.
Micro-Liquidity: Supply-Side Disruptions from Lock-Up Expiries in Q3
Beyond macro fundamentals and valuations, Hong Kong stocks also face micro-liquidity pressures this year. Since the second half of 2025, the scale of Hong Kong listings has noticeably increased compared to before. The average monthly IPO size in Hong Kong from 2022 to mid-2025 was about HK$70 billion. After the second half of 2025, this figure consistently exceeded HK$100 billion, and although it dipped in May, it remained above HK$100 billion. Against the current backdrop of tight macro liquidity, downward earnings revisions, and insufficient foreign capital回流, the disturbance from new supply on market liquidity is amplified. In the long term, Hong Kong absorbing new economy companies is essentially reshaping the market structure. Continuous listings of quality IPOs have the potential to enhance overall corporate quality. If liquidity improves subsequently, new share supply could反而 become a vehicle for structural upgrading.
Corresponding to IPOs is the pressure from share lock-up expiries. Newly listed Hong Kong stocks typically face a lock-up period of 6 to 12 months. The large-scale issuance in 2025 implies significant lock-up expiries in 2026. The third quarter of 2026 is particularly concentrated: July expiry size is HK$297.665 billion, August is HK$78.094 billion, and September is HK$476.723 billion, totaling over HK$850 billion, representing a relatively high proportion of the current Hong Kong stock market capitalization. In terms of the expiry structure, larger-scale expiries are mainly concentrated in industries such as non-ferrous metals, software services, consumer services, and pharmaceuticals & biotech. At the individual stock level, the expiry for Zijin Mining Group's international shares is notably large. Large-scale expiries not only increase market supply pressure but may also impact the valuation of related stocks. The alignment between the expiry schedule and the market's capacity to absorb this supply warrants attention.
Long-Term Outlook: The Convergence of Earnings and Liquidity is Key
Although Hong Kong stocks face short-term pressure, from a long-term perspective, there is optimism regarding the appeal of Hong Kong stocks as offshore renminbi-denominated assets. Hong Kong stocks serve as an offshore pricing window for Chinese assets to global capital, with valuations more deeply influenced by US dollar liquidity. Therefore, they also possess greater elasticity when pressure from the US dollar and US Treasuries eases. Regardless of the ultimate direction of US-Iran tensions, over an extended timeframe, historical geopolitical conflicts have seen oil price surges eventually calm down. As inflation pressures ease and the Federal Reserve continues its interest rate cutting path, pressure on the valuation side is expected to decrease significantly.
First, looking at earnings expectations, this is the most critical turning variable for capturing Hong Kong's shift from weakness to strength in the medium to long term. Amid the AI wave, Hong Kong's fundamental earnings are more skewed towards the application end of the AI industry chain, with no significant profit contribution in the short term. However, the application end is not without opportunity. Internet platforms possess users, data, payment systems, content, e-commerce, local services, and cloud infrastructure. Once AI application commercialization begins to accelerate, profit elasticity may be repriced by the market. Beyond AI applications, resource products benefiting from global supply constraints and emerging market capital expenditure, pharmaceuticals & biotech benefiting from innovative drug出海 and improved R&D efficiency, and manufacturing出海 benefiting from the reshaping of global supply chains will together constitute multiple threads for earnings recovery.
For Hong Kong indices to stabilize, an earnings inflection point is needed. This inflection point may come from three directions. First, earnings forecasts for heavyweight platform companies stop being revised downward, with recovery in advertising, gaming, local services, and cloud businesses. Second, pressure from losses in the automotive and consumer tech sectors eases, with price competition transitioning from disorderly to rational. Third, AI applications, innovative drugs, resource products, and manufacturing出海 contribute new upward earnings revisions. Low valuations, long-term allocation by southbound funds, and the increasing influence of renminbi assets determine that Hong Kong stocks have bottom support. However, earnings downgrades, high US dollar and Treasury yields, expiry supply, and foreign capital outflows determine that Hong Kong stocks need time to complete an expectations rebalancing. Structurally, in the short term, focus can be on sectors with stronger earnings resilience, more stable cash flows, and less disturbance from expiries. In the medium term, focus on AI application commercialization, profit margin recovery for internet platforms, innovative drug出海, resource product prices, and manufacturing出海. The key to Hong Kong's subsequent market performance is not proving valuations are low enough, but proving that low valuations can be repaired by both earnings and liquidity. What has suppressed Hong Kong stocks recently is the downward revision of earnings expectations, high US dollar and Treasury yields, and micro supply-side disruptions. If two of these three pressures begin to reverse, Hong Kong stocks gain a foundation for repricing. If all three reverse simultaneously, Hong Kong stocks can then transition from catch-up gains to a trend-following行情.
Risks include the sustainability of the consumption recovery remaining uncertain. This year, household consumption has begun to warm up, but the recovery level is limited. Whether it will continue to fluctuate at low levels or move closer to a normalized growth rate still requires close monitoring. If consumption remains persistently weak, the momentum for economic recovery will be constrained. Uncertainty also remains over whether the real estate sector can continue to improve. The current real estate downturn cycle has lasted for a considerable time. While there is a brief warming trend currently, many indicators still show negative growth. Whether this warming trend can be maintained requires further observation. There are risks related to statistical completeness due to data availability, as well as risks of estimation errors from model failure and data statistical errors. The impact of monetary tightening in Europe and the US may exceed expectations, dragging down global economic growth and asset price performance. Geopolitical conflicts remain uncertain, disturbing global economic growth prospects and market risk appetite.
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