Hong Kong stock market: sentiment weak, waiting for opportunity

1) Hong Kong stocks fluctuated and fell, with the telecommunications sector leading the market. From June 24th to 28th, major broad-based indices experienced varying degrees of adjustment, and the market turnover was relatively weak, with the Hang Seng Index and the Hang Seng Tech Index falling 1.7% and 4.0% respectively. In terms of style, state-owned enterprises and high-dividend factor stocks resisted the decline relative to other sectors, while small-cap stocks exhibited significant adjustments. In terms of strategy, the Shanghai and Shenzhen-Hong Kong Stock Connect AH Smart Index outperformed risk control and multi-factor combinations. In terms of industry, the telecommunications sector led the market (+3.5%), while utilities also provided a positive return (+0.7%), and the information technology and medical care industries fell over 3%;

2) The marginal decline in the economic benefits of industrial enterprises. From January to May of this year, the cumulative total profit of industrial enterprises increased by 3.4% year-on-year, and fell by 0.9 percentage points from the previous month. The inventory growth rate of finished products in May was 3.6%, which has increased for six consecutive months compared to the previous month, indicating a certain stocking phenomenon in production activities, but the intensity is relatively moderate. Considering that the leading M1 growth rate is still weak, the inventory growth rate is expected to remain volatile in a low range, and the switch to an active replenishment state in the overall economy still needs to wait;

3) When both the volatility and trading volume are low, the upward momentum of Hong Kong stocks may be relatively limited. Volatility reflects the degree of divergence, and trading volume represents trading sentiment. Therefore, when the market is in a situation of low volatility and trading volume, the pessimistic sentiment of investors is often more obvious, and the stock index lacks a bright market. Since 2021, under the challenge of the Hang Seng Index falling more than 30%, risk control strategy has recorded cumulative positive returns of 6.3%, especially the performance since 2023 is more outstanding. Considering that the current market sentiment is relatively weak, the short-term success rate of Hong Kong stocks may be relatively limited;

4) Looking ahead, the greatly improved sentiment of both domestic and foreign investors has already triggered a more significant rebound for Hong Kong stocks. The sustainability and upside space in the future waiting for more solid fundamental data verification. With regards to sector allocation, on the one hand, sectors with higher dividend yields, such as utilities, energy, finance, and telecommunications, are expected to provide considerable relative returns even if market volatility rises; on the other hand, the technology industry represented by semiconductors and the internet plus-related industry will still be the main driving force for industrial transformation and is expected to benefit from government support and domestic substitution.

US stock market: uncertainty over US election still remains

1) The US stock market continued its upward trend, with the energy sector continuing its rebound. From June 24th to 28th, after Biden and Trump held their first televised debate, market trading reflected a possible victory for Trump, and his conservative trade and immigration policies may pose obstacles to inflation elimination, causing the 10-year US Treasury bond yield to rise to 4.4%. During the observation interval, the S&P 500 and the Nasdaq both hit historical highs again, while the Dow fell slightly by 0.1%; in terms of style, small-cap and growth factors performed best, while quality and dividend factors fell more than 1.2%; in terms of strategy, GARP was better than multi-factor and style rotation strategies; at the industry level, the energy sector continued its rebound trend, while raw materials and utilities led the market decline;

2) Uncertainty over the US election still remains, and economic uncertainty has increased to some extent. Although Trump had some advantage in the first televised debate, according to poll results, the gap between the two candidates is not very clear, and on June 29th, Trump and Biden's approval rate was 46.8% and 44.9%, respectively, with a difference of 1.9% close to the central level of the past year. The subsequent trend of opinion polls still has certain variables. In addition, during the presidential election years since 2012, the US NFIB economic uncertainty index has shown a continuous upward trend, and the policy path adjustment caused by the election results may have a significant impact on economic growth and inflation withdrawal, and subsequent attention still needs to be paid to the responses of the Biden team and Trump's judicial disputes;

3) The sentiment of major asset pricing remains stable. Since the beginning of this year, the global market has experienced major events such as the escalation of the Middle East situation, the fluctuation of the US economy, and the fluctuation of the Fed's interest rate cut timing, but the pricing fluctuations of major assets have rarely shown significant volatility. The adjustment of the spread of global high-yield bond options and the volatility of G10 exchange rates have continued to decline since 2023. While the Nasdaq hit a historic high, its market width centralization has been constantly sinking. Therefore, the low volatility trend of major assets reflects to some extent the stable expectations of global investors. The probability of a deep adjustment in the US stock market due to internal and external factors may still be low; 4) In terms of investment strategy, assuming that the benchmark hypothesis of a slowdown in the US economy in the next few quarters, US stocks may come under pressure in the medium term, but short-term market risk appetite remains high and the probability of a significant adjustment in the US stock market may be low. In terms of industry allocation, first, if the subsequent manufacturing PMI continues its downward trend, defensive sectors represented by public utilities may perform well; second, the trend of the AI industry is still in the verification stage, focusing on the configuration opportunities of some technology sub-sectors. 2) Risk warning: Rapid tightening of overseas liquidity; Risk of a hard landing in the US economy; The international situation is becoming more complex.

2) On investment strategy, under the assumption of the benchmark of a slowdown in the US economy over the next few quarters, US stocks may come under pressure on a medium-term dimension, but the short-term market risk appetite remains high and the probability of a significant correction of the US stock market may be low. In terms of industry allocation, if the PMI of the manufacturing industry continues to decline, the defensive sector represented by public utilities may perform well; while the trend of the AI industry is still in the verification stage, it is important to focus on the configuration opportunities of some technology sub-sectors.

Risk warning: Rapid tightening of overseas liquidity; Risk of a hard landing in the US economy; The international situation is becoming more complex.

Edited by Jeffrey