Hong Kong stocks are currently navigating a triple window of recurring geopolitical risks, earnings season validation, and divergent capital flows. Overall, the market is highly likely to maintain a pattern of volatility and divergence, making a sustained directional trend unlikely. Investment strategy should shift from the previous approach of betting on broad market rebounds to focusing on structural opportunities with higher certainty. Strategically, investors should focus on three main themes: cyclical sectors, financials and discretionary consumption, and the technology sector.
First, within cyclical sectors, the focus should be on safe-haven assets like gold and energy, as well as chemicals with tightening supply, such as methanol and polyethylene. Exposure to sectors with high volatility like defense and critical metals should be temporarily reduced.
Second, the financial and discretionary consumption theme presents opportunities. Financial stocks, including banks and insurers, are trading at historically low valuations, with price-to-book ratios around 0.6 times and dividend yields exceeding 4%, offering substantial safety margins. They are suitable as core holdings but chasing rallies is not advisable. Within discretionary consumption, investors should selectively target auto industry stocks with strong export performance and verified earnings, while avoiding companies that have issued profit warnings or are experiencing slowing growth.
Third, in the technology sector, priority should be given to companies in the AI application space, such as those related to the token economy, that have already achieved commercial deployment and demonstrated strong earnings realization. Leading internet companies, which have seen increased buying from southbound capital despite market headwinds, can serve as defensive core holdings. Upstream hardware sectors like semiconductors face challenges from excessive capital expenditure, profit concerns, and geopolitical risks; it is advisable to delay contrarian investments here and wait for a clearer inflection point.
Regarding last week's market performance: From March 30 to April 3, the Hang Seng Index rose by 0.66%, while the Hang Seng Tech Index fell by 2.07%. The Hang Seng China Enterprises Index increased by 0.04%. Among primary sectors, six industries advanced while five declined. Healthcare led gains, rising 6.77%, followed by Materials, up 3.01%, and Financials, up 2.37%. Energy declined 3.48%, Information Technology fell 1.02%, and Utilities dropped 0.98%. At the secondary industry level, pharmaceuticals, non-ferrous metals, banks, food & beverage, and automobiles & parts were among the top performers, while durable consumer goods, coal, paper & packaging, petroleum & petrochemicals, and semiconductors were among the biggest decliners.
In terms of market liquidity last week: The average daily turnover on the Hong Kong Exchange was HKD 269.207 billion, a decrease of HKD 40.398 billion from the previous week. Southbound capital recorded a cumulative net inflow of HKD 5.371 billion, a reduction of HKD 19.775 billion from the prior week. For the seven days up to April 1, global active foreign funds recorded a net outflow of $90 million from Hong Kong-listed Chinese stocks, while global passive foreign funds recorded a net outflow of $761 million. These figures represent a change of an increased net inflow of $188 million for active funds and a decreased net inflow of $1.369 billion for passive funds compared to the previous week.
Regarding Hong Kong market valuation and risk appetite: As of April 2, the Hang Seng Index's price-to-earnings ratio was 12.31 times and its price-to-book ratio was 1.24 times, placing them at the 80th and 57th percentiles, respectively, relative to levels since 2010. The yield on the 10-year US Treasury note fell by 13 basis points from the previous Friday to 4.31%. The risk premium for the Hang Seng Index stood at 3.82%, which is 1.68 standard deviations below its three-year rolling average, at the 3rd percentile since 2010. The Hang Seng Stock Connect AH Premium Index decreased by 1.29 points from the previous Friday to 119.19, at the 14.94th percentile level since 2014.
On the short-term US-Iran conflict: The current tensions are unlikely to see a clear resolution in April or throughout the second quarter. Oil tanker traffic through the Strait of Hormuz has fallen to about 3% of normal levels, and oil prices fluctuating in a high range of $90 to $110 per barrel has become the baseline scenario. Markets have largely priced in the "inflation shock," but concerns about a "growth shock"—where high oil prices could suppress global demand—are likely to become the next risk requiring vigilance.
Against this backdrop, Hong Kong stocks remain in a triple window period characterized by recurring geopolitical risks, earnings season validation, and divergent capital flows. The market is expected to continue its pattern of volatility and divergence, with a sustained trend unlikely. The investment strategy should therefore evolve from seeking broad-based rebounds to capturing returns through structurally certain opportunities.
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