Guotai Haitong 2026 Hong Kong Stock Strategy: Prospects for Reaching New Heights.

In 2025, with the emergence of DeepSeek, a wave of revaluation in Chinese assets is set off, with Hong Kong stocks showing particularly strong performance. Looking ahead to 2026, despite the external environment still being full of variables, new opportunities are accelerating to emerge - the AI wave is thriving, the global loose monetary cycle continues, and at the same time, China's "15th Five-Year Plan" is fully launched. With these multiple forces resonating, Hong Kong stocks are expected to ride the wave and move towards new heights. What are the driving factors for the continued bullish trend of Hong Kong stocks next year? Which industries are expected to stand out? 1. Hong Kong stocks have sufficient upward potential in valuation Currently, Hong Kong stocks are not considered high in valuation, with plenty of room for upward valuation. The overall performance of Hong Kong stocks in 2025 was impressive, with market valuations quickly repaired under the boost of rising risk appetite and stabilizing profit expectations. Despite this, the overall valuation of Hong Kong stocks is still not considered high, especially the technology sector's valuation advantage is more prominent. Looking ahead to 2026, low valuation provides ample room for further upward movement in Hong Kong stocks. On the index level, the valuation of Hong Kong stocks is at a global low point, with room for repair. Compared to historical levels, the current valuation of Hong Kong stocks is not considered high, especially the PE ratio of the Hang Seng Index at 11.9 times, which is at the 84th percentile since 2012, and the PE ratio of the Hang Seng Technology Index at 23.3 times, which is in the 32nd percentile since data is available. From a global perspective, the valuation percentiles of Hong Kong stocks are significantly lower across various industries, such as Hang Seng Technology (30% since 2005), Hang Seng Index (62%), which are lower than the S&P 500 (95%), NASDAQ (88%), Germany's DAX (79%), Japan's Nikkei 225 (73%), and India's Nifty50 (72%). In addition, compared to A shares, the current AH premium is 120, slightly lower than the historical average, indicating further downward potential compared to the lows of 2010, 2014, and 2020. At the industry level, the technology sector of Hong Kong stocks and other sectors offer higher valuation attractiveness. Considering that Hong Kong and A shares have gone through a complete bull and bear cycle since 2019, we calculate the historical percentiles of various industry valuations starting from early 2019. As of October 23, 2025, compared to A shares, the PE and PB percentiles of the information technology, utilities, and real estate industries in Hong Kong are relatively low, with percentiles of 55%, 35%, and 33% respectively, while the corresponding industry valuations for A shares are 95%, 65%, and 45%. Compared to US stocks, the valuation percentiles of most industries in Hong Kong stocks are relatively low, especially in real estate, utilities, daily consumption, information technology, and consumer goods sectors, with PE and PB percentiles of 33%, 35%, 40%, 55%, and 53% respectively, significantly lower than the US stocks at 96%, 97%, 85%, 97%, and 81%. Adjustments since October may be nearing an end, with significant potential for valuation uplift for Hong Kong stocks in the future. The trend of Hong Kong stocks this year has seen "two rises and two falls", with the strong revaluation of Chinese assets driven by the introduction of large models and the commercialization of AI. In the second quarter, after adjusting for tariff impacts, Hong Kong stocks rebounded quickly, with new consumer and innovative drugs becoming the main themes in the changing industry trends. Starting from September, the optimism of internet giants like Alibaba and Baidu fueled the strength of the technology sector once again. However, since October, disturbances such as the escalation of US-China tariffs, the US government shut down, and Russia-Ukraine negotiations have increased, resulting in a overall decline in Chinese assets including Hong Kong stocks. From October to now (as of October 23, 2025), the Hang Seng Technology Index has dropped by 8%, the ChiNext Index has fallen by 5%, and the Hang Seng Index has dropped by 3%. Structurally, sectors that had experienced significant increases in the past saw more pronounced corrections, such as hardware (-11%), media (-9%), semiconductors (-9%) in the technology sector, as well as durable goods (-11%), defense (-10%), and innovative drugs (-10%). The correlation between Hong Kong and A shares is continuously strengthening. In our article "Who Sets the Mood for the Rise and Fall of Hong Kong Stocks - 20250624", we pointed out that since 2020, the correlation between Hong Kong stocks and US stocks has weakened, while the correlation with A shares has significantly increased. This is due to the acceleration of Southbound funds flowing into both regions, strengthening the liquidity linkage; on the other hand, the listing of high-quality Mainland companies in Hong Kong and the returning of Chinese concept stocks have synchronized the fundamentals of Hong Kong with the mainland. Going forward, the core driving factors for the future of Hong Kong stocks will come more from the domestic market. Drawing from historical experiences, the adjustment period for Hong Kong stocks may be significant, with great potential for valuation uplift from both a valuation and profit perspective. In our article "Learning from History: How Significant is the Timing of this Adjustment in Hong Kong Stocks - 20251019", we mentioned that previous pullbacks in the Hong Kong stock market showed that on average, the Hang Seng and Hang Seng Technology indexes experienced small setbacks with maximum declines of around 7% and 9% respectively, lasting for 12 trading days, while major pullbacks saw average maximum declines of about 17% and 21%, lasting for 53 days. In the current adjustment since October, the maximum declines for Hang Seng and Hang Seng Technology indexes are 8% and 15% respectively, approaching or exceeding the maximum declines for historical small pullbacks, with the duration of the adjustment approaching historical averages. Combining the analysis above, the current valuation proposition for Hong Kong stocks is further highlighted after the correction. Furthermore, from the perspective of valuation-profit matching, Hong Kong stocks are roughly in the balanced range, and in the medium term, the catalyzation of the AI industry is expected to bring about an improvement in the ROE of Hong Kong stocks, leading to a rise in valuation that will gradually align with similar indexes like the ChiNext Index and NASDAQ. 2. Hong Kong stocks have high certainty in attracting incremental capital The impressive performance of the Hong Kong stock market in 2025 is supported by abundant capital, with significant support from a less pronounced outflow of foreign capital and an accelerating inflow of domestic capital. Looking ahead to next year, we believe that Hong Kong stocks will remain a market with high certainty in attracting incremental capital. We will analyze this from the perspectives of domestic and foreign capital. Regarding foreign capital, there are signs that the prolonged outflow of foreign capital has stabilized since the middle of the year, and next year, the return of foreign capital to Hong Kong stocks is expected to exceed expectations. In recent years, foreign capital has been continuously flowing out of Chinese assets, with foreign capital allocation to Chinese equity assets currently at a significantly underweight level. For example, as of Q3 2025, Chinese assets accounted for only 3.3% of the MSCI ACWI index's asset size, which is significantly lower compared to China's nearly 20% share in the global economy and capital markets. Looking further into the Hong Kong stock market, foreign capital has seen a net outflow of over 1 trillion Hong Kong dollars since 2024, with the market value of shares held by foreign capital decreasing from 66% to 60%. The continued outflow of foreign capital has kept market expectations low for its return. However, since mid this year, long-term foreign capital has shown signs of returning, with several occasions of substantial inflows, such as inflows of nearly 70 billion Hong Kong dollars from May to July and around 13 billion Hong Kong dollars since September. Additionally, according to COPLEY, overseas active funds were the most active in China's assets from February to August this year, ranking first among major economies globally. This indicates signs of stability in foreign capital inflows. Combined with the aforementioned factors, the underweight foreign capital allocation to Chinese equity assets, along with recent signs of foreign capital returning, leads us to believe that the situation of foreign capital rebounding Hong Kong stocks may further marginally improve next year. The Federal Reserve's 25BP rate cut in September, along with lower-than-expected inflation data in August and September, and the recent public statements by Powell indicating the possibility of further rate cuts and near cessation of balance sheet reduction, all suggest that the Federal Reserve in 2026 may still have room for further rate cuts. If the Fed continues to cut rates next year and liquidity conditions loosen, while US-China trade relations continue to stabilize, the scale of foreign capital flowing back into Hong Kong stocks may exceed expectations. On the domestic capital side, in recent years, the pricing power of domestic capital has been increasing, and next year, it is expected that Southbound funds will continue to flow into Hong Kong stocks, surpassing 1.5 trillion yuan. While foreign capital has been flowing out consistently in recent years, domestic capital represented by Southbound funds is accelerating its marginal pricing power in Hong Kong stocks. So far in 2025, Southbound funds have flowed in over 1.1 trillion yuan, surpassing the full-year inflow of 744 billion yuan in 2024. Looking further into this, the inflow of Southbound funds in 2025 has been mainly driven by institutions such as public funds and insurance funds, due to the attractiveness of high-quality scarce assets in Hong Kong stocks like internet and new consumption sectors to actively-managed public funds, as well as strengthened dividend supervision policies and the continuous allocation of insurance funds to Hong Kong stocks under a low interest rate environment. Looking ahead, institutional incremental funds are expected to continue flowing into Hong Kong stocks, and we will now quantify Southbound funds' inflow for the full year of 2026 from an institutional perspective. Active public funds are expected to flow in about 200 billion yuan for the year, considering the upper limits of Hong Kong stock investment ratios for active stock mutual funds as of Q2 2025. Additionally, with the total market cap of Hong Kong stocks remaining roughly the same size as at the end of 2020, and considering that new Hong Kong stock fund sizes reach about 50 billion yuan after market sentiment improved in 2021, it is estimated that active public funds may flow in about 200 billion yuan for the full year under neutral assumptions. For passive public funds, since Q3 2025, the net purchase volume of Hong Kong stock passive funds has increased significantly. Taking into account the proportion of institutional investors for ETFs that saw increased purchases in Q3 and the trend of passive investment, it is expected that passive public funds will continue to flow in about 200 billion yuan for the full year under neutral assumptions. Regarding insurance funds, the incremental size of insurance funds inflow into Hong Kong stocks mainly depends on two core variables: one being the equity asset allocation indicator used by insurance funds and the other being the proportion of Hong Kong stocks in their equity allocation. We have made scenario assumptions for the two variables - pessimistic, neutral, and optimistic - to estimate that under neutral assumptions, insurance funds may flow in about 400 billion yuan for the full year of 2026. For private equity funds, since the beginning of this year, the inflow of private equity funds into Hong Kong stocks has been significant, and by using the change in private fund size multiplied by the percentage of Hong Kong stocks in their portfolio, the estimated total inflow until August is about 150 billion yuan for the year. Since the current bull market, private equity funds have held a higher market value of Hong Kong stocks compared to the market as a whole, suggesting a pursuit for chasing gains. It is expected that the inflow of private equity funds next year will continue to be high, with an estimated total of 3000 billion yuan under neutral assumptions for the full year. In addition to institutional funds, under neutral assumptions, it is predicted that retail investors' incremental capital will amount to 400 billion yuan next year. Based on the calculations above, we believe that with the driving force of domestic and institutional funds, the net inflow of Southbound funds for the full year of 2026 is expected to surpass 1500 billion yuan. 3. Hong Kong stocks have a strong scarcity of high-quality assets The bull market in Hong Kong stocks is supported by scarce high-quality assets. In addition to the advantages of low valuation and ample incremental capital, another supporting factor for the upward trend of Hong Kong stocks in 2026 is the advantage of scarce assets in Hong Kong stocks. Looking back at the three periods in history when Hong Kong stocks had an advantageous position, namely 2012-2014, 2016-2018, and 2019-2021, scarce assets in Hong Kong stocks played a crucial role in attracting incremental capital and driving Hong Kong stocks to outperform. The current bull market in Hong Kong stocks is similar to that of 2012-2014. During 2012-14, China's economic growth slowed down, and despite domestic fundamentals gradually improving under policy support, the economy remained relatively weak. At the same time, there was a revolution in the technology industry with the rapid development of the mobile internet sector, the commercialization of 3G and 4G, and the acceleration of the popularity of smartphones, leading most of China's internet giants listed in Hong Kong to reflect the industry revolution. Internally, the fundamentals of these companies were ahead of A shares, with a greater improvement in performance in the context of weak economic recovery. Scarcity assets in Hong Kong stocks are concentrated in the areas of the internet, new consumption, innovative drugs, and dividends. Looking at the current situation, China is at an important juncture of transition from old to new growth drivers, and domestic funds are facing asset scarcity pressure. Despite the lack of upward elasticity at the macroeconomic level, profound changes are occurring at the industrial level. For example, China's consumption structure is evolving, and the AI-driven new consumption cycle is deepening, indicating that Hong Kong stocks with scarce assets in consumer goods, AI applications, and other sectors are more advantageous. - AI Technology: In the Hong Kong stock technology sector, the total market value of downstream software industries such as software services and media account for 55%, compared to 24% in the A-share technology sector. This shows that the internet and software sectors in Hong Kong stocks, which benefit from AI applications, are more concentrated. Looking at individual stocks, technology giants like Tencent and Alibaba in Hong Kong stocks cover the entire AI industry chain, from large model development to commercial applications and terminal ecosystems. Leveraging their leading technological advantages, they are expected to benefit fully from the AI industry revolution. - New Consumption: A-shares mainly consist of traditional consumption sectors like liquor and home appliances, with these two sectors accounting for over 70%. In contrast, the distribution of sub-sectors in the consumption industry in Hong Kong stocks is more balanced, where new retail, consumer services, and textile industries account for over 60% of the total market value of new consumption sectors, featuring popular new consumption stocks like POP MART, LAOPU GOLD, and MIXUE GROUP this year. This sector in Hong Kong stocks better aligns with the trend of consumers pursuing self-satisfaction and value for money. - Innovative Drugs: The differences between A and H shares in the pharmaceutical sector lies in the fact that the total market value of the biotechnology and medical technology sectors in Hong Kong stocks account for 40%, while in A shares, they account for 24%. This indicates that Hong Kong stocks have a higher level of innovation in the pharmaceutical sector. Looking at the proportion of innovative drugs listed in the CXO Index to the overall medical segment of each market, in Hong Kong stocks it is about 57%, higher than A shares' 31%. Therefore, Hong Kong's innovative drugs and CXO sectors are deemed scarcer compared to A shares. - Dividends: In contrast to the scarcity assets of the internet and new consumption sectors in Hong Kong stocks compared to A shares, the scarcity of dividend assets in Hong Kong stocks is mainly manifested in their relative advantages over A shares. Firstly, the cash dividend ratio in Hong Kong stocks is higher compared to A shares. Secondly, the dividend yields in Hong Kong stocks are higher, with lower valuations, and are more evenly distributed across industries. In the future, as Chinese companies continue to return to the Hong Kong market and A-share companies pursue secondary listings, it will further reinforce the scarcity of high-quality assets in Hong Kong stocks. Since 2024, the policies have encouraged mainland enterprises to list in Hong Kong. In April last year, the "New Nine Policies" outlined expanding and optimizing cross-border connectivity mechanisms in capital markets, and in October, the China Securities Regulatory Commission and the Stock Exchange declared to expedite the approval process for A-share companies meeting the criteria. With the efficient approval mechanism and flexible refinancing environment in the Hong Kong market, high-quality companies like Contemporary Amperex Technology and Jiangsu Hengrui Pharmaceuticals have successively made secondary listings, while A-share companies like Luxshare Precision Industry, SisSonic, and Sungrow Power Supply are in the process of listing in Hong Kong. Along with the trend of returning Chinese concept stocks, the accumulation of high-quality assets in Hong Kong stocks is expected to contribute to further narrowing the AH valuation gap. 4. Focus on the technology theme in Hong Kong stocks in 2026 As mentioned earlier, looking ahead to 2026, with the valuation still having potential for uplift, high certainty in attracting incremental capital, and the continuous accumulation of high-quality scarce assets, Hong Kong stocks are poised to rise, and the bullish trend remains unchanged. Structurally, we believe that the theme of technology in Hong Kong stocks will be the main theme of the market in 2026, with a focus on innovative drugs and securities. The technology sector of Hong Kong stocks is set to be the main theme under the AI trend. Recently, the AI industry trend at home and abroad has been accelerating. On September 30th, OpenAI released its latest video generation model, Sora2, reshaping the paradigm and boundaries of video content generation. On October 20th, the latest domestic large model DeepSeek-OCR was released, speeding up text processing by treating text as an image. These industrial breakthroughs are opening up a new growth curve for Chinese technology companies, who are expected to increase their capital investment in the AI sector. Hong Kong's technology leaders are spread across the entire AI industry chain, covering large model development, commercial applications, and end-to-end ecosystems. They are expected to benefit fully from the industrial revolution. Furthermore, there's an increasing level of policy support for the technology sector, focusing on building up computing infrastructure and fostering AI applications. For instance, in August of this year, the State Council issued the "Opinions on Deepening the Implementation of the 'AI +' Action", setting targets for 2027 like achieving a penetration rate of over 70% for the market of AI-powered smart terminals, and on October 16th, the Ministry of Industry and Information Technology further called for the accelerated deployment of high-performance networks between computing centers. With these policies gradually implemented, the industry of artificial intelligence is expected to scale up. Therefore, with the progression of the