The internal and external shocks have been gradually reversed, and the "inflection point" of Hong Kong stocks has been established since May.

Benefiting from the rebound since May, the Hang Seng Composite Index has outperformed the S & P 500 by 10.7 percentage points so far this year, or even slightly outperformed the CSI 300, completely reversing the "rolling bear market" since July last year. Due to the nature of the offshore market of Hong Kong stocks, the conflict between Russia and Ukraine after the Spring Festival and the tightening of overseas currencies significantly magnified investors' concerns about domestic industrial regulation, real estate credit risk, local epidemic and the United States delisting Act in March and April. At one point, the Hang Seng Index fell as much as 26%.

On March 16, Vice Premier Liu he gave positive guidance on issues such as stable growth policies, real estate risks, regulation of US-listed stocks, platform economic governance, and Hong Kong's financial market stability, leading to a significant repair of market confidence. In just one week, the Hang Seng Index rebounded by more than 20%.

However, since late March, local outbreaks have occurred again in China, and the drag on fundamentals by epidemic prevention and control policies in many cities has gradually become the core concern of the market.

Since May, with the spread of the epidemic gradually under effective control, various stable growth policies have accelerated the recovery of fundamentals from bottom to bottom, and the inflection point of Hong Kong stocks has been established.

In addition, the turnover of Hong Kong stocks has also rebounded significantly since mid-May, rising from about HK $70 billion to HK $140 billion, further confirming the rebound in investor confidence.

It is expected that five major factors will continue to promote the "gathering strength recovery" of Hong Kong stocks in the second half of the year.

Looking forward to the second half of the year, it is expected that the external risk factors that suppressed the performance of Hong Kong stocks, such as the conflict between Russia and Ukraine, delisting, and concerns about the liquidity of the Hong Kong stock market, have gradually faded; and with the support of internal stable growth policies, the rebound trend of fundamentals bottoming out has already emerged; the introduction of new policies such as ETF Tong and SPAC is also expected to bring a new round of reform dividends.

Combined with the valuation advantage, we judge that the trend of continuous increase in global capital allocation since late May will continue to promote Hong Kong stocks to continue to repair in the second half of the year:

1) liquidity is expected to warm up:Investors still expect the Fed to continue its aggressive tightening path until the first quarter of next year, but leading indicators have indicated that US consumption and employment could deteriorate rapidly in the second half of the year. With the risk of recession intensifying, the Fed may be forced to raise its inflation target to ease pressure on real economic growth and the stability of the financial system. Liquidity in the overseas Chinese stock market is expected to warm up after the third quarter.

2) the policy of stabilizing growth:The local epidemic situation has been brought under control to lay the foundation for stable growth policies. Monetary and fiscal policies are expected to remain loose, driving down real financing costs, and special bond issuance is expected to remain at a high level. In terms of industry, "policy due to the city" means that there is still room for mortgage interest rates to fall; policies such as post-epidemic relief and consumption promotion are also introduced one after another, which are expected to lead to the recovery of consumption in the future; and Internet regulation has entered a normal stage. it has further strengthened investors' confidence in the new economy sector of Hong Kong stocks.

3）Fundamentals will pick up quickly after bottoming out in the second quarter:As the local epidemic situation has alleviated and the policy of superimposed stable growth has been continuously put into force, the upward trend of China's fundamentals has appeared since May. At present, Shanghai has achieved zero social clearance, and the full resumption of work, production, resumption of the market, logistics and transportation difficulties are also beginning to marginal improvement, the domestic economy has entered a stage of stepped recovery.

4）Profit is expected to rebound, valuation has advantages:With fundamentals bottoming out, corporate profits are expected to rebound gradually in the second half of the year. Since the end of May, the earnings growth forecasts of the four major Hong Kong stock indexes we have tracked have all stabilized this year, ending the continuous downward trend since the beginning of the year. FactSet consensus forecasts also show that the Hang Seng Index's net profit growth is expected to rebound to more than 13% in 2023, and the valuation advantage of Hong Kong stocks will be further highlighted in the valuation switch in the second half of 2022.

5）The new round of capital market reform dividend:In the second half of the year, the Hong Kong stock market will always adhere to financial openness, and ETF will broaden overseas investment channels, which is conducive to medium-and long-term funds entering the market; the opening of SPAC will enrich the targets for investment in Hong Kong and enhance the diversification and attractiveness of the Hong Kong stock market; the first batch of REITs in China is about to be lifted, and high-quality overseas REITs with high dividends is expected to attract investors' attention. The Hong Kong stock market has always adhered to the reform of the capital market, continuously optimized and introduced new investment channels and financial products, and brought more choices to investors.

Looking forward to the second half of the year, the Hong Kong stock market as a whole is expected to show an N-shaped upward trend.

CITIC expects that from now to August, external risks will gradually ease, and internal stable growth policies will continue to promote a rapid recovery of fundamentals compared with the previous month. Before the mid-reporting period, multiple benefits are expected to push Hong Kong stocks up continuously.

The market volatility may increase from mid to late August. On the one hand, the uncertainty of the performance reported in individual industries may lead to a downward revision of earnings expectations, on the other hand, the market still has great differences on the September FOMC meeting, and does not rule out the possibility that the US attitude towards China may be repeated before the US mid-term elections. These three major factors may increase the volatility of Hong Kong stocks at that time.

However, it is expected that after the internal and external risks are digested again in early November, with the gradual warming of global liquidity and the significant valuation advantages of Hong Kong stocks, the valuation switch market is expected to be good for the global capital allocation of Hong Kong stocks again from the middle of the fourth quarter. To configure the main line, we recommend that you focus on:

1) throughout the second half of the year:Under the normalization of regulation, the Internet sector whose valuation is low and its performance has bottomed out is expected to usher in a continuous valuation repair; in addition, the valuation of Hong Kong stocks has been significantly revised back since the beginning of the year, and the advantages of the safety margin and dividend yield of some value and cycle sectors are highlighted. These two main lines deserve long-term attention.

2) third quarter：The gradual weakening of the impact of the local epidemic will lead to the strengthening of the main line of resumption of work and production, recommending sectors such as infrastructure, semiconductors, automobiles, photovoltaic, etc.; under the conflict between Russia and Ukraine and the recovery of domestic fundamentals, oil prices are expected to remain high in the short term, leading to a high performance of the energy sector. Recommend petroleum, chemical and other sectors

3) fourth quarter:With the strong support of the stable growth policy, the growth rate of real estate sales is expected to become positive, and the elimination of real estate credit risk will catalyze the valuation repair of the large financial sector; the economic recovery is also expected to lead to a rebound in disposable income growth and the accumulation of wealth effect, and the performance of the consumer sector is expected to pick up.

Risk factors:

1) the Fed tightened monetary policy more than expected; 2) developed countries fell into large-scale recession or stagflation; 3) geopolitical conflicts further escalated; 4) domestic industrial regulation or regulatory measures for overseas listed companies were tightened; 5) stable growth policies were launched less than expected.