Driven by positive factors such as further optimization of epidemic prevention and control policies, Hong Kong stocks still made positive gains in the last week of 2022. As a whole2022 will be a challenging year for Hong Kong stocks.. After a sharp fall in 2021, the further weakness of Hong Kong stocks in 2022 exceeded the expectations of most investors. The Hang Seng Index and the Hang Seng Technology Index fell 15.5% and 18.6% respectively. MSCI China Index and the growth sector accounted for the higher Hang Seng Technology Index fell as much as 22.4% and 27.2%. Under the "triple pressure" (tightening of the Federal Reserve, weak growth in China, and geopolitical tensions), overseas active funds continued to flow out throughout the year, reaching $14 billion, increasing market pressure and volatility. However, thanks to the easing of these "triple pressures", the Hong Kong stock market has rebounded significantly since November, narrowing the gap with the rest of the world.

Chart: the main stock indexes of the overseas Chinese stock market fell in 2022.

Hong Kong stocks are expected to gradually get out of the predicament in 2023We expect the driving force behind this to come initially from risk appetite and valuation repair, and then from earnings improvement in economic growth repair after the second quarter of 2023. The Hong Kong stock market is expected to have 20% room for repair in 2023, based on 6% earnings growth and 12% valuation.

But,The market may rise in twists and turns.The pace depends on the strength and speed of domestic growth repair, especially in view of the recent increase in short-term growth pressure under the influence of the epidemic. For example, China's official manufacturing PMI fell by another 1.0 percentage point to 47.0% in December, the third consecutive month of contraction, hitting the lowest level since it fell to 35.7% in February 2020.

CICC Macro Group pointed out that the recent COVID-19 epidemic has had an impact on both domestic supply and demand, and the decline in external demand has also had a negative impact on this factor against the backdrop of rising fears of global recession. At the same time, the net profit data of industrial enterprises above scale from January to November in 2022 was also lower than market expectations. Affected by similar factors, the cumulative year-on-year decline in the first 11 months of 2022 was 3.6%, an increase of 0.6 percentage points compared with the previous 10 months.

Chart: PMI of China's manufacturing industry falls further to contraction range

In this context, we expect more favorable policies to be introduced.

The Central Economic work Conference has made this position clear. Last week, for example, China took a new step in optimizing its domestic epidemic prevention and control policies, including the implementation of a "Class B tube" for novel coronavirus infection and the elimination of quarantine measures for inbound personnel. In addition, the regular meeting of the monetary policy committee of the central bank in the fourth quarter of 2022 pointed out that it will stabilize economic growth, employment and price levels and promote the expansion of domestic demand. The State Press and publication Administration announced a new round of game version numbers in December 2022, and a total of 84 domestic online games were approved. The State Press and publication Administration also issued a batch of imported game version numbers, and a total of 45 imported games were also approved. This is the first time that China has issued imported game version numbers since June 2021.

Externally, the Fed's aggressive tightening is one of the main sources of emotional and liquidity pressure on Hong Kong stocks in 2022.Looking forward, while increased recessionary pressure may still bring pressure, we expect the slowing pace of Fed tightening to give Hong Kong stocks a respite, similar to what has happened since November.

In the short term, after the peak of the epidemic, after economic activity resumes, US inflation falls further and the pace of Fed tightening slows.We expect the market to return to action at the beginning of the year.

Specifically, the main logic that underpins our point of view and the factors we need to pay attention to last week include:

1) since January 8, 2023, China has implemented a "Class B tube" for novel coronavirus infection.

2) affected by the epidemic situation of COVID-19, PMI decreased further in December.

3) due to the lingering disturbance factors such as the epidemic situation, the net profit of China's industrial enterprises above scale has further declined.

4) China has issued imported game version numbers for the first time in 17 months.

5) liquidity: southbound capital inflows continue to be strong, while the outflow trend of overseas active funds remains unchanged.

Investment建议

Overall, we believe that the market continues to rise amid twists and turns, domestic policy changes and the Fed's policy path are worthy of attention. In terms of configuration strategy, we recommend that investors pay more attention to high-quality growth (low PEG), such as those under policy optimization.Consumption and real estate, the Internet and health care that are expected to be reversed, and high-tech manufacturing.Wait in three directions. We recommend that we overallocate some information technology (software and semiconductors), media entertainment, optional consumption and services, as well as some health care and real estate, and maintain a cautious view of raw materials, industry, transportation, public utilities, etc.