Source: Finance Association
① The Hang Seng Index hit a new high in the short term. Which trading signals are worth paying attention to? ② CICC says the sustainability of the market can be viewed from three dimensions. Which factors are the most critical?
Hong Kong stocks, which have been dormant for three years, are suddenly booming recently. Under the leadership of technology stocks, there has been a sharp rise in the market.
The Hang Seng Index also hit a new high in the new year after five consecutive waves. It has accumulated a weekly increase of nearly 9%, the biggest weekly increase since October 2011, and has recovered to the level of November last year.
Looking ahead to the future market, how long will the current strength of Hong Kong stocks last, and what are the prospects? The CICC Strategy Team gave an analysis in its latest report:
Who is the main “driver” of the short-term surge in Hong Kong stocks?
First, CICC pointed out that capital is the main driving force for Hong Kong stocks to surpass expectations.
After synthesizing various data and information, CICC discovered that active capital outflows from foreign capital continued (EPFR caliber), so it is speculated that transactional and other types of capital may be the main ones.
According to the data, as of April 24 (Wednesday), EPFR's overseas active capital outflows of US$310 million from the Hong Kong stock market, which is narrower than the previous week's outflow of US$420 million, but it has been outflows for the 43rd consecutive week.
CICC said that transactional capital accounts for 5% of foreign investment in Hong Kong stocks, and active value capital accounts for 50%. However, the return of allocation-type funds is probably more of a hedging switch to avoid interest rate hikes by the Bank of Japan and fluctuations in US stocks. It has certain hedging and trading properties, so it is still difficult to determine whether it can form a continuous inflow.
In addition, the southbound capital continues to flow in and marginal inflows into the new economy sector. Due to the large inflow of dividend assets previously, the allocation to the new Internet economy has fallen to a new low in 2019, and the rotation of capital is also in line with sector rotation.
It is worth noting that according to the latest disclosure of public fund holdings in the first quarter, public equity holdings and the share of southbound capital continued to decline, which means that some of the capital flowing into Hong Kong stocks may be dominated by non-public funds.
In terms of the sector, it mainly flowed into banking, energy, raw materials, telecommunications and other sectors after the Spring Festival. The share of holdings in new economic sectors such as the Internet fell to a new low since 2019, and the difference in allocation was quite obvious.
On the other hand, according to CICC's tracking and monitoring, recent macro-high-frequency data is mixed. Industrial production and real estate are still weak, and consumption has improved.
CICC believes that macroeconomic fundamentals and corporate profits have not changed much. It can be seen from this that the sharp rise in the market was not driven by changes in fundamental factors. Instead, policy expectations and eventual factors provided some catalyst.
On April 19, the Securities Regulatory Commission issued the “5 Capital Market-Hong Kong Cooperation Measures” (“Interpretation of the 5 Capital Market-Hong Kong Cooperation Measures”) and the Ministry of Finance's proposal to support the central bank to gradually increase liquidity in treasury bond trading, etc., all of which made investors have positive expectations for the advancement of other key measures in the future. In addition, optimization of aspects such as dividend tax on Hong Kong stocks and real estate policies in first-tier cities has also attracted much attention.
What is the outlook for the Hang Seng Index after surging?
Since the unexpected surge in Hong Kong stocks surpassed the expectations of many investors, what the market is most concerned about now is how sustainable it will be after the surge? According to CICC, it can be considered in terms of transactions, capital rotation, and fundamentals.
First, at the transaction level, capital-driven rapid increases are often rapid, but overdrafts are also fast, and need to be supported by continuous long-term capital inflows.
Judging from technical and sentiment indicators such as the degree of overbought and the share of short sales, the current level of overbought Hong Kong stocks has reached a new high since January 2023, and the share of short sales transactions has quickly fallen back to a recent low of 16%.
Considering that the Hang Seng Index around 18,000 is also a key resistance level on the daily, weekly, and monthly lines, it is clearly emotionally overdrawn.
Second, if capital is mainly transactional capital, momentum will also decline after external pressure is released, so we need to pay attention to subsequent changes in long-term and allocation-type capital.
In the short term, the pressure on the external environment may take some time to ease. At the same time, we also need to pay attention to trends in the Federal Reserve and US stocks.
Fundamentally, CICC also believes that the reallocation of long-term capital requires fundamental improvements and coordination. In particular, fiscal policy is strengthened to deal with the current problems of declining inflation and credit contraction.
More fiscal stimulus that directly reaches the demand side is the key. We need to pay attention to the degree of improvement in monthly fiscal balance and social finance data, as well as central bank debt purchases and important meeting policies.
Overall, in the current environment, CICC suggests focusing on the fluctuations that may be brought about by overdrafts and transactional capital in short-term transactions. With no significant improvement in fundamentals, the market may have formed a clear seesaw between high dividends and technological growth, and recent performance has simply rotated between the two.
editor/tolk