To The Moon

The Hang Seng Tech Index has demonstrated a notable rebound since July, rekindling global investor interest in the sector. The index touched an interim low of 4,229 points on June 26th. By the close on July 20th, it had risen to 4,752.15 points, marking a cumulative gain exceeding 12.4% over this period. Notably, the index surged 4.97% on July 8th, its largest single-day increase in nearly three months, and climbed 5.72% during the week of July 6th to 10th, setting the record for the biggest weekly gain of the year. Following a decline of nearly 20% earlier in 2026, the index's recent recovery has led market participants to anticipate a gradual normalization of valuations and underlying company values.

Attractive Valuations Present a Potential Opportunity

The primary allure of the Hang Seng Tech Index currently lies in its compelling valuation levels. Data indicates that, as of the July 20th close, the index's trailing price-to-earnings (P/E-TTM) ratio stood at 22.61 times, placing it at approximately the 37th percentile of its five-year valuation range. Its price-to-book (P/B) ratio is around 2.5 times, also positioned at a historically low level. The trailing P/E of about 23 times represents only about 38% of its own historical peak valuation. In a comparative context, the index's valuation advantage is pronounced. As of July 20th, the STAR 50 Index's P/E ratio was 235 times, the ChiNext Index's was 47 times, and the Nasdaq Index's P/E hovered between 35 to 36 times. The Hang Seng Tech Index's valuation is not only below its own historical average but also significantly lower than other major domestic and international technology indices. Many institutions maintain an optimistic outlook for the sector. Market analysis suggests the recent valuation contraction was not driven by a fundamental deterioration in the sector's health but rather by factors like foreign capital outflows and periodic retreats by southbound funds, influenced by the offshore nature of the Hong Kong market. Numerous institutions argue that the current low valuations have largely priced in market pessimism, leaving limited room for further significant downside.

Dual Catalysts: Southbound Flows and Global Rebalancing

Valuation and capital flows are two pivotal factors influencing market direction. Currently, the Hang Seng Tech sector is attracting attention from both domestic and international capital. Southbound fund flows have shown a marked shift recently. Data reveals an acceleration in southbound capital inflows since July, with a cumulative net purchase of HK$336.5 billion for the month, compared to HK$271.1 billion for the entire month of June. In the first six trading days of July, net purchases reached HK$476.1 billion, and the week of July 6th to 10th saw a net inflow of HK$390.55 billion, the highest weekly net inflow since April. Market analysis views this activity partly as short-term profit-taking, not altering the broader medium-term inflow trend. Year-to-date through July 20th, southbound funds have accumulated a net purchase of HK$3,796.44 billion in Hong Kong stocks, with leading companies like Zhipu AI, Tencent, NetEase, Alibaba, and SMIC consistently receiving allocations. Concurrently, international investors are gradually shifting focus from markets like South Korea to Hong Kong. Since the start of 2026, the South Korean stock market has experienced substantial foreign capital outflows, with a cumulative net outflow exceeding US$100 billion. On July 20th, South Korea's KOSPI index fell 4.46% to close at 6,516.27 points, down over 20% from a recent high and entering technical bear territory; the index lost over 20% for the month, triggering multiple market circuit breakers. On the same day, the Hang Seng Tech Index rose 2.79%. This divergence in market performance reflects global capital reallocation. In a report dated July 13th, Goldman Sachs recommended positioning across China's full AI industry chain. The firm's data shows China's AI sector accounts for 10% of the global AI market's total market capitalization and 16% of related revenue. Currently, global mainstream funds have only a 1.2% allocation to Chinese AI-related stocks, indicating significant room for increased positioning.

Confluence of Industry, Policy, and Liquidity Tailwinds

Whether the Hang Seng Tech sector's rebound transitions into a sustained recovery hinges critically on industry development trends and the policy environment. Key factors include the progression of the AI industry from an investment phase to a profitability phase, alongside stable macro policies and market liquidity. Positive signs are emerging in both areas. In May, Hang Seng Indexes Company announced the inclusion of Zhipu AI and MiniMax into the Hang Seng Tech Index, effective June 8th. This marks the first inclusion of leading domestic AI large model companies since the index's 2020 launch. Zhipu AI, originating from Tsinghua University, has globally leading technology with its GLM series of large models. MiniMax possesses full-modal independent R&D capabilities across text, vision, and audio, and has launched consumer-facing products globally with an overseas user base exceeding 200 million. This constituent change is viewed by the market as a significant signal of the index's strategic tilt towards AI. From an industry structure perspective, AI hardware-related stocks hold a weight of approximately 15% in the Hang Seng Tech Index, compared to over 60% in indices like the STAR 50 and South Korea's KOSPI. As AI commercialization accelerates, the value of application areas such as advertising, local services, enterprise cloud, and smart devices is poised for reassessment. Coupled with several internet and AI firms launching next-generation large models, market capital is gradually focusing on downstream AI application sectors. Secondly, the implementation of systemic supportive policies by the central bank has provided a significant boost to Hong Kong assets. On July 7th, at the Hong Kong Monetary and Fixed Income Summit, People's Bank of China Governor Pan Gongsheng announced multiple financial support measures. This announcement, dubbed a "systemic heavyweight policy" by the market, injected strong policy confidence into the Hong Kong stock market. Core measures include expanding the scale and scope of Bond Connect's Southbound Trading, increasing the annual net investment quota from RMB 500 billion to RMB 800 billion; supporting Hong Kong in launching a 5-year offshore Chinese government bond futures contract; and enhancing offshore renminbi market liquidity by expanding the scale of RMB business funding arrangements from RMB 200 billion to RMB 500 billion and extending the term to three years. The market widely perceives these supportive policies as creating a stable policy environment for Hong Kong stocks. Following prolonged adjustments, overall valuations in the Hong Kong market have returned to reasonable-to-low levels, gradually highlighting their medium-to-long-term allocation value. Notably, Morgan Stanley recently forecasted that August could mark a key liquidity inflection point for Hong Kong stocks. The pressure from July IPO lock-up expiries has largely dissipated. Combined with the expansion of Southbound Trading, incremental allocation from foreign reserves, and short covering, market liquidity is expected to improve significantly.

Navigating Structural Opportunities Within a Diverging Landscape

In summary, while the Hang Seng Tech sector overall presents valuation advantages, performance divergence within the sector is evident. For large internet companies, the global advancement of AI technology poses challenges to traditional businesses, and profit growth remains uncertain. Hong Kong-listed tech hardware firms exhibit valuation differences compared to their A-share counterparts, and with rising demand for computing power hardware, various sub-sectors display distinct characteristics. Many institutional analyses suggest the sector is currently in a phase where valuation repair and fundamental improvement are occurring simultaneously. In the second half of 2026, factors such as a consumption recovery, corporate profit repair, AI industry development, and domestic substitution are expected to introduce multiple positive variables to the sector's operating environment. However, more cautious views posit that the recent uptrend is primarily a technical rebound following an oversold condition. It may be premature to declare a complete sector reversal at this stage, and continued monitoring of core variables like overseas liquidity conditions and corporate earnings expectations is necessary. Overall, the Hang Seng Tech sector has experienced both earlier adjustments and a recent recovery phase in 2026. Current valuations are at relatively low levels, coupled with optimistic market expectations for corporate profit growth. The confluence of sustained southbound inflows, the implementation of mainland financial support policies, and global industry reallocation are collectively influencing the sector's trajectory. For capital market participants, it is prudent to rationally assess market volatility and valuation changes, conducting comprehensive analysis that incorporates industry fundamentals, the macro environment, and other key dimensions.