According to a report by Zhongjin, last week, the Hong Kong stock market rebounded to 18,000 points due to the expectation of a Fed interest rate cut. However, this rebound did not last long. In particular, there was a sharp pullback last week, especially on Friday (19th), and the Hang Seng Index once again fell below 18,000 points. Correspondingly, investor sentiment is even more depressed, and the percentage of short selling transactions has rapidly climbed from a low of 12.9% to a relatively high level of 18.5%. In terms of funding, overseas funds continued to be weak. The scale of northbound funds flowing out on a weekly basis was once again close to 20 billion yuan, and EPFR data shows that foreign funds outflow has also accelerated. At the same time as the index weakened, some high dividends sectors that had led the market since the beginning of the year, such as energy and raw materials, also experienced a significant pullback, which has caused investor concern.

According to Zhongjin, the internal environment is the key to determining the direction of the Hong Kong stock market. At the end of last year, despite a sharp drop in US bond interest rates, the Hong Kong stock market continued to fall. From July to September 2019, when the Fed had already begun cutting interest rates, the Hong Kong stock market continued to fluctuate, and active overseas funds continued to flow in, both of which were evidence. From this perspective, the recent weak data and the uncertain expectations for future policy directions may be more important factors dragging down the market. China's second-quarter GDP increased by 4.7% year-on-year, lower than the market's expectations of 5.1% and the first quarter's 5.3%. Among them, exports continued to show resilience, but the slow down of domestic demand led to a weak total demand. Insufficient consumer ability and willingness, as well as the variables that the general election's trade policy may bring to exports, still indicate the necessity of fiscal stimulus to offset the weak or even shrinking credit cycle of the private sector in order to boost domestic demand.

In addition, the high dividend style that had led the market since the beginning of the year has recently experienced a significant pullback, once again triggering discussion in the market about whether the high dividend factors have 'burned out.' Zhongjin believes that first, the recent pullback of seemingly high-dividend sectors may not necessarily be attributed to the dividend factor itself, but more to industry factors, such as the impact of the 'Trump trade' on the energy and raw materials sectors. It is just that high-dividend targets in A shares and Hong Kong shares have a relatively high degree of overlap with the energy and raw materials sectors, so attributing their volatility to the dividend factor alone is too one-sided. Second, after experiencing a large increase, it is normal for high dividend factors to experience some pullbacks due to rotation, and this does not change the long-term investment logic. Considering that the 10-year treasury yield is around 2.3% currently, with a certain risk premium, the bank reminds investors to be cautious when the dividend yield is lower than 4% in A-shares (lower than 5% in Hong Kong shares), and to re-enter after a sufficient pullback.

Third, short-term fluctuation does not change the long-term investment logic determined by the macro environment. In the background where the credit cycle is not significantly opened and the long-term growth expectation is downward, the high dividend factor still has investment value to provide stable returns to hedge against the downward trend of long-term returns, unless there is a large-scale fiscal stimulus. However, recent fluctuations also illustrate the bank's long-standing reminder that when selecting high-dividend targets, it is necessary to focus on profit and dividend-paying ability rather than simply the high or low dividend yield, so targets that have stable earnings and strong future dividend-paying ability may actually provide better opportunities in recent fluctuations.

In summary, under the benchmark scenario, Zhongjin believes that expecting strong stimulation is still unrealistic, and various internal and external constraints make it difficult for policies to be presented in an 'all-in-one' manner. Under these circumstances, compared with an index-level bull market, the market is more likely to maintain a structural bull market under turbulent patterns. In terms of allocation, under the short-term overseas interest rate trading, growth sectors that benefit from the denominator logic may have higher flexibility, such as semiconductors, automobiles (including new energy), media and entertainment, software, biotechnology, etc. Conversely, high dividends may lag behind in the short term, but this does not change the overall allocation pattern.

Overall, Zhongjin continues to follow the allocation logic in the bank's outlook for the second half of the year, recommending three directions in the structural bull market: downward overall returns (high dividends with stable returns and high buybacks, i.e. 'cash cows' with ample cash flow), partial leverage (especially technological growth that is closely related to high-quality new production factors supported by the third plenary session's policies and still has growth potential), and partial price increases (natural monopolies, upstream and public utilities).