Middle East Tensions Ease As Institutions Say Hong Kong Stocks Enter An Earnings‑Driven Phase

On April 20th, despite ongoing volatility in the Middle East, risk pricing in the Hong Kong equity market has largely normalized. Huatai Securities’ latest research note argues the market is likely to transition from sentiment‑driven dynamics to an earnings‑driven phase, and recommends focusing on structural opportunities revealed by industry trends and cyclical indicators.

Huatai suggests short‑term positioning aligned with earnings expectations, emphasizing internet names leading in cloud services and large models where profits appear to be stabilizing, as well as cyclical commodities such as lithium and copper that are seeing strong upward revisions to profit forecasts. Over a medium horizon, the firm favors maintaining exposure to low‑volatility dividend payers, including Hong Kong domestic stocks, and upgrades semiconductors (notably memory), large‑model platforms, and cloud service leaders to overweight. The report also advises gradually increasing allocations to certain essential consumer categories, such as dairy and condiments, as domestic and external demand rebalance and operating cycles approach inflection points.

On the funding front, inflows and short‑covering have supported the market’s recovery. As of last Wednesday, EPFR‑based statistics show foreign net inflows into Hong Kong equities of US$800 million, up from US$640 million the prior week. Active foreign investors recorded a net outflow of US$10 million while passive foreign capital contributed net inflows of US$810 million. Short‑selling activity eased, with the short ratio falling 2.0 percentage points to 13.1%, and short positions declining by 0.05 percentage points to 2.38% over two weeks, indicating a pattern of short covering. Southbound flows reversed sharply, with net inflows of HK$25.8 billion last week after a net outflow of HK$11.8 billion the week before; electronics, banking, pharmaceuticals, petrochemicals, and coal were among the leading sectors receiving inflows.

Sentiment measures have recovered to neutral territory and a range of indicators have improved. Major U.S. and A‑share indices have recouped losses, while Hong Kong’s principal indices still trade below pre‑conflict levels by 2.8%, 2.0%, and 1.9% respectively. Since the onset of the conflict, sectors such as autos, new energy, and pharmaceuticals have posted relatively strong gains. The Hong Kong sentiment index now reads 44.0, placing it within the neutral band. The shift to southbound net inflows and a less robust U.S. dollar have lifted metrics tied to southbound capital intensity, net buying strength, and the AH premium, which moved from prior readings of 20, 16, and 54 to 25, 26, and 65 respectively. Technical and fundamental indicators including RSI, implied volatility, turnover, and the gold‑implied exchange rate have also shown improvement. Since its launch in September of last year, the sentiment‑based timing strategy has delivered excess returns relative to the Hang Seng Index for both pure long and long‑short approaches.

With sentiment restored to neutral and geopolitical risk windows narrowing, the scope for a broad beta‑driven rebound appears limited and sector dispersion is likely to increase. Huatai recommends constructing portfolios around earnings momentum, seeking alpha in internet names where profit expectations show signs of bottoming and in metals where upward revisions are pronounced. Dividend strategies remain relevant, and selective accumulation of cost‑effective names such as leading coal producers is advised. From a medium‑term perspective, the firm continues to favor low‑volatility dividend stocks and Hong Kong domestic equities that stand to benefit from local economic recovery, while maintaining an overweight stance on AI‑related segments—semiconductors, large models, and cloud services—given their favorable visibility. The report also highlights opportunities in essential consumer categories that are near cyclical turning points.

On fundamentals, Huatai notes that Bloomberg consensus earnings expectations for Hong Kong non‑financials were revised down 0.4% over the past four weeks but turned up by 0.2% in the most recent week. Within hot sectors, Hang Seng Tech shows signs of earnings stabilization with a 1% upward revision last week, whereas innovative pharmaceuticals continue to retreat from prior highs, declining 2% in the latest week. Metals exhibit the strongest upward revision trend, with increases of 9.7% over four weeks and 1.6% over one week, and the breadth of revisions suggests a widespread improvement. New energy also recorded notable upward revisions, though these were concentrated among leading companies. On a weekly basis, coal and semiconductors displayed the greatest earnings‑revision elasticity, each improving by 2.6% in the most recent week, while earnings expectations for hardware equipment continued to be revised downward despite recent sector strength.