Sinolink International: Hong Kong stock valuation has a rebounding foundation, recommending positioning in high dividend value stocks and leading technology companies with independent controllability.

CITIC Bank (International) released its economic and investment outlook for the third quarter of 2026. The report pointed out that the Hong Kong stock market has a basis for rebound in terms of valuation, but the future trend still depends on the strength of mainland macroeconomic policies and signals of reversal in foreign capital inflows. In terms of allocation, the bank recommends deploying value stocks with high dividends and ample free cash flow for defense, or investing in technology stocks and leading high-end manufacturing companies that align with China's "self-reliant and controllable" strategy and have already adjusted valuations sufficiently to capture policy catalytic opportunities. Zhang Haoen, the investment director of personal and business banking at the bank, stated that artificial intelligence (AI) remains a core theme in the market in the long term, but AI and semiconductor-related stocks that have made significant gains in the early period have seen high-level retracements. Some funds are flowing into value stocks and sectors that are relatively lagging but have catalysts, including finance and healthcare. Zhang Haoen pointed out that in the outlook for the third quarter, investors should focus on the sustainability of corporate capital expenditure, inflation stickiness, and the outlook for interest rates as core risks. It is advisable to moderately increase allocations to defensive, high-dividend, or themed value sectors to avoid excessive concentration on a single AI concept stock and reduce the overall volatility of the investment portfolio. Ding Meng, the chief economist of the bank, stated that the situation in the Middle East remains one of the market's focus points. Fed Chairman Powell's monetary policy stance is more hawkish than previously expected, raising the probability of a US rate hike next year, which will affect global funding costs and risk preferences. Against the backdrop of a possible rate hike and stock market correction in the U.S. in 2027, the bank expects a roughly 5% correction in Hong Kong residential prices in the second half of 2026, with a full-year price increase of around 5%.