To The Moon

Hong Kong stocks surged today, with $HSI(HSI)$ once jumping nearly 8%. Internet, new energy, biomedical, food and beverage sectors all rose. 

Investors finally welcome the long-lost bullish trend in HK stock market.

• Does it mean that the bull market has returned?

The answer is yes. If you buy hk stocks this time, the probability of positive returns is 100%!

This statement was justified by Guosen Securities in a research report on November 2. The core argument of the research report is that the current dividend yield of Hong Kong stocks is as high as 6.3%, which is close to the lowest point of HSI in 2008 and the highest dividend yield of 6.6% in the history of HSI.

In the past 40 years of history, such a bottom has only occurred five times. The median yield for buying and holding at this position for one year is 38% and the probability of positive return is 100%.

1. Dividend yields can be used as a measurement for all Hong Kong stock bottoms

The SARS bottom in 2003, the HSI's dividend yield was 4.5%.

The "financial crisis bottom" in 2008, the HSI's dividend yield was 6.6%.

In early 2016, the A-share meltdown and the Hong Kong exchange rate problem, the HSI's dividend yield was 4.5%.

Several important bottoms had dividend yields of more than 4.5%.

The dividend yields of every bottom; from Guosen Securities

After 2016, the HSI included many new economy companies such as $Meituan(03690)$ , $XIAOMI-W(01810)$, $Baidu(BIDU)$ , $Alibaba(09988)$ , $JD.com(JD)$ , $NetEase(NTES)$ , etc. These companies pursued growth with little dividend.

As a result, the book dividend yield of the Hang Seng Index is only 4.5%. However, if we use the historical comparable HSI (i.e. 2016 constituents and weights) as an anchor back in 2016, the dividend yield is as high as 6.3% at the close of October 2022.

2. 100% positive return when buying at the bottom

On the day of the lowest point in 2008, the HSI dividend yield was 6.6%. Using this as a reference, the HSI has only about 5% room to go down.

Drawing a support level based on historical data, the HSI is still above the support level at present.

(red line is the support level)

data from wind; compiled by Guosen Securities

Historically, if one buys at the support level (red line), the probability of a positive return the following year is 100%, with a return of 43% for holding a 1-year.

In terms of P/E ratio, Hong Kong stocks are at their lowest in 20 years.

After the big drop, the net buying of southbound funds in October was as high as 67.6 billion, a new high for the year.

3. The easing expectations of the pandemic lead the rally

In addition to dividend yield and valuation at historical extremes, the recent surge is also due to the easing expectations of the pandemic.

Earlier, there were rumors that the market would be opened up in March next year. Although the rumors were debunked, there are more and more signs that the opening expectations are heating up.

1. the intensive visits to China by dignitaries from many countries in November. It's rare in the latest 3 years.

2. the abolition of checking nucleic acid at many train stations and airport entry points.

3. several official media started to release news that the virus is a self-limiting disease and the public need not panic, etc. This type of news is also the first time to appear intensively.

All in all, with the vaccine, special drugs and countries relax pandemic controls, China is increasingly expected to open up.

From a fundamental perspective, Chinese companies dominate the Hong Kong stock market.

As of October 4, 2022, the total market capitalization of Hong Kong Chinese stocks reached HK$36.8 trillion, accounting for 73.6% of all Hong Kong stocks; in the first half of 2022, the revenue and net profit attributable to Chinese stocks in Hong Kong were HK$24.0 trillion and HK$2.3 trillion respectively, accounting for 88.9%/90.7% of all Hong Kong stocks.

Therefore, the trend of cumulative year-over-year net attributable profit of Hong Kong stocks and A-shares remains largely consistent.

Bottom Line

If the market is expected to open soon, the listed companies' performance is expected to bottom out. Among the factors affecting market bulls and bears, earnings determine the medium and long-term trend.

Today's big gains in stocks, retail, consumer sector rose ahead, including e-commerce stocks $Alibaba(09988)$ jumped 11%.

At that time, listed companies are expected to usher in a double rise in performance and valuation, commonly known as the Davis double play.