China Securities Co., Ltd.: Is the current rebound in Hong Kong stocks a retracement or a reversal?

China Securities Co., Ltd. released a research report stating that the current rebound of the Hong Kong stock market can be understood in two ways: from a global technology cycle perspective, it can be seen as a transition from hardware bottlenecks to "monetization of applications," resulting in a natural market reaction; from the perspective of the Hong Kong stock market itself, it can be interpreted as the end of significant pressure and the market attempting to emerge from a low point and enter a rebound. China Securities Co., Ltd. believes that the Hong Kong stock market is indeed escaping from multiple pressures, but whether it can enter a genuinely long-term bull market or a significant bull market still requires overcoming two important thresholdsimprovement in corporate profits and easing of U.S. dollar liquidity. The former determines the trend of a bull market, while the latter influences its magnitude and elasticity. Until the Hong Kong stock market decisively crosses these two crucial thresholds of profit improvement and easing U.S. dollar liquidity, it is more accurate to view it as having surpassed the peak of pressure, leading to valuation recovery after the overselling. China Securities Co., Ltd.'s main points are as follows: I. Hong Kong stocks rebound while "hard technology" experiences setbacks The current rebound of the Hong Kong stock market features two interesting phenomena: One interesting phenomenon is that the Hong Kong stock market has formed a precise "teeter-totter" effect with the global AI hardware market. Earlier this year, as the Korean and Japanese stock markets rose, the Hong Kong market was weak; this time it is reversed. Since July, with the deleveraging causing stock prices in Korea and Japan to collapse, the Hong Kong stock market has been on the rise againanother instance of the teeter-totter effect. Another interesting phenomenon is that this rebound in the Hong Kong stock market is not a comprehensive one but rather a "K-shaped" divergence. The "K-shaped" divergence of the Hong Kong stock market is different from the previous divergences seen in the AI hardware market for U.S., Japan, and Korea. This time, the Hong Kong rebound is led by sectors such as consumption and cyclical stocks, with application-side assets, including internet, consumer, and automotive sectors, taking the lead, while previously crowded AI hardware shares have clearly pulled back. Whether through the teeter-totter effect or the K-shaped divergence within the Hong Kong stock market, this rebound is truly a reflection of the global AI hardware market's trends. The significant divergence between Hong Kong stocks and those in Japan and Korea essentially reflects a structural switch happening in the main line of global AI trading. After funds exited high-valuation sectors, the Hong Kong stock market became the main focus for capital due to factors such as having experienced nearly indiscriminate selling in the first half of the year, low exposure to AI hardware, and overall valuations compressed to historical lows. II. The rebound is due to the alleviation of prior extreme pressures. By the end of June, the Hong Kong stock market faced the triple pressures of "low positioning, high shorting, and low valuation," leading to near-freezing market sentiment. In our previous special report titled "How Do We View the Hong Kong Stock Market from the Current Perspective," we systematically discussed the market conditions facing the Hong Kong stock market and our judgments on future trends. To understand why the Hong Kong stock market has continued to be weak since 2025, we can also understand why it is experiencing a rebound at the moment of declining global AI hardware prices. Factor one: The reduction in large model prices lowers the cost of AI applications, allowing application-side assets in Hong Kong to regain pricing power. Companies like DeepSeek continue to lower the model invocation prices, with improvements in model capabilities occurring simultaneously with a reduction in inference costs. The Hong Kong internet platforms possess user bases, traffic, payment, advertising, e-commerce, and cloud service scenarios, benefiting directly from the lowering of entry barriers for AI applications. Consequently, capital is shifting from the capital-intensive hardware sector to application-side assets with greater commercialization potential. Factor two: Policy measures are releasing liquidity dividends, leading to increased inflows of southbound funds. On July 7, the governor of the central bank, Pan Gongsheng, explicitly stated at the "Hong Kong Fixed Income and Currency Summit and Bond Connect Forum" that the national foreign exchange reserves would continue to increase their asset allocation ratio in Hong Kong, injecting more momentum into the development of the Hong Kong capital market. In the past six months, the liquidity environment for the Hong Kong stock market has been weak, impacted by the U.S. Federal Reserve maintaining high interest rates, tightening U.S. dollar liquidity, and continued foreign capital outflows. The increase in foreign reserves allocated to Hong Kong assets resonates with the expansion of the southbound trading. Factor three: The fluctuation of the U.S. dollar index has moderately alleviated the pressure on the Hong Kong stock market's denominator, leading to a stabilization of profit expectations after previous rapid downgrades. In July, the U.S. dollar index remained within a range, preventing further tightening of global liquidity, thus providing a window for previously suppressed valuations in the Hong Kong stock market to recover. Finally, and most importantly, in the context of a marginally improving macro environment, after witnessing concentrated downgrades in profit forecasts for internet platforms, automotive, and consumer technology in the first half of the year, the market has sufficiently priced in negative factors. Recently, the pace of profit downgrades in the Hong Kong stock market has slowed, which is enough to propel the recovery of undervalued assets. III. Is it a rebound or a reversal? A true bull market still needs to cross two major thresholds We believe that this current market rise cannot be defined as a typical bull market but is closer to a valuation recovery after an overselling phase. This is because achieving a bull market requires thoroughly addressing the three major negative factors that have suppressed the Hong Kong stock market, particularly issues around corporate profits and U.S. dollar liquidity. In July, the Hang Seng Index saw a significantly higher increase compared to the Hang Seng Tech Index, with upward momentum mainly stemming from fund rotation, valuation recovery, and short covering, rather than from an overall improvement in corporate profits. We believe this phenomenon confirms our judgment. After a rapid increase in the index, the space relying solely on valuation and capital-driven growth will gradually shrink. For the Hong Kong stock market to transition from a rebound to a reversal, it must overcome two major thresholds: First, profits, profits, and more profits. Because profits are the ultimate determining factor in the long-term trend of the Hong Kong stock market. After 2023, the rebound in Hong Kong stock profits lacks elasticity, and the index's focus will no longer systematically shift upwards, making the capital environment a core pricing variable. The profits of the current AI industry cycle are concentrated in upstream hardware, while Hong Kong's internet platforms are still in the phase of capital expenditure expansion and intensified industry competition, with profit expectations yet to form stable support. If profit forecasts for internet platforms cease to decline, AI applications begin to generate substantial revenue, and competition in pricing for automobiles and local living becomes more rational, then the Hong Kong stock market may shift from oversold rebounds to a trending market. Attention should be paid to the performance of key company financial reports as we enter mid-year reporting season in August. Second, the improvement of liquidity will determine the elasticity and magnitude of a bull market in Hong Kong stocks. Recent fluctuations in the U.S. dollar, the return of foreign capital, and low allocations by public funds have led to a marginal improvement in the liquidity environment, driving the Hong Kong stock market's rebound. In the second quarter, actively managed equity mutual funds reduced their allocation to the Hong Kong stock market to 15.1%, a decrease of 7.4 percentage points from the first quarter. A low positioning indicates that once expectations continue to improve, there is still room for capital replenishment. However, we must also recognize the problems surrounding liquidity in the Hong Kong stock market. First, the global trend of U.S. dollar liquidity. Currently, the yield on 30-year U.S. Treasuries has risen above 5%, making the Hong Kong stock market, as an offshore market, extremely sensitive to U.S. dollar liquidity, thus maintaining pressure on the valuation ceiling. Second, after the phase of declining lock-up pressure, there will still be a new round of lock-ups at the end of the year, and in the first quarter of 2027, there will be pressure from cornerstone investors releasing their holdings six months after the Hong Kong IPO in the third quarter of 2026.