To The Moon

Hong Kong stocks have rallied a bit hard recently. The Hang Seng Index is up nearly 10% in the last month, and the Hang Seng Technology Index is up over 20% in the last three months.

A market's stock price performance depends on the earnings and valuation levels of the companies it covers.

Among them, most of the companies listed in Hong Kong stocks originate from mainland China, so the Chinese economy determines the earnings level of Hong Kong stocks; while investors in Hong Kong stocks come from all over the world, so the dollar liquidity and risk appetite represented by the relationship between China and the United States determine the valuation level of Hong Kong stocks.

To answer a few questions that you must know to invest in Hong Kong stocks.

1. Why did Hong Kong stocks fall in this round?

2. The reason for the rise of Hong Kong stocks

3. How is the valuation of Hong Kong stocks?

4. When can Hong Kong stocks usher in a bull market

1. From a historical perspective, most of the bear markets in Hong Kong stocks are related to the lower risk appetite of Hong Kong stock investors due to China's economic environment, the Fed's monetary policy and some black swan events.

The current bear market is no exception, especially the first two rounds of decline, risk appetite reduction is the main reason; if the market reversal, also need to wait until the above factors get better.

So far, the HSI has fallen by a maximum of more than 40%. Even if we look at history, the duration of this round of decline has exceeded the historical average of all rounds of bear market since 1997, and the maximum decline is also very close to the historical average. If we only look at the last two decades, the maximum decline in the current bear market is second only to 2008.

2. On the one hand, the United States is exploring the issue of trade tariffs to ease its inflationary pressures.

On the other hand, regarding the delisting risk of Chinese stocks, both Chinese and U.S. authorities have released their willingness to actively communicate, and both have recently indicated that they have made some progress. Subsequently, when the cooperation between China and the U.S. outweighs the differences, the easing of the delisting risk of Chinese stocks will release the valuation pressure of the relevant companies.

As you can see, from the risk appetite, the previous risks brought about by policy or geopolitical uncertainty are tending to improve, or at least not worse, which brings certainty to the valuation repair after Hong Kong stocks.

3. In historical comparison, at its lowest point, the Hang Seng Index P/E PE and P/N PB valuations were 8.8 and 0.88 times, respectively, at 6.8% and 0.12% deciles over the past 20 years, implying that its valuation has been below the historical range of over 90% and 99%, respectively.

4. There are 2 conditions for the arrival of a systematic bull market in Hong Kong stocks:

First, wait until the end of the U.S. interest rate hike cycle, as Hong Kong stocks are a spillover of overseas funds, especially U.S. liquidity. If the Fed enters an easing cycle in the future, this time relatively cheap Hong Kong stock assets will be subject to increased allocation by investors; second is to wait until Hong Kong stocks corporate earnings start to move upward.

Because the biggest risk for Hong Kong stocks is not the Fed rate hike itself, but the earnings of Hong Kong stocks facing downside risk at the same time as the rate hike cycle.