According to a report released by China International Capital Corporation Limited, Hong Kong's stock market fell again last week, mainly due to the sharp decline in US stocks and the lack of clear growth in domestic economy, as well as the insufficient expectation of follow-up policy stimulus, which continued to put pressure on the market. Hong Kong stocks fell along with A shares last week, and the mid-week slump in US stocks added new pressure, with the Hang Seng Index falling below 17,000 points and breaking through the support near 18,000 points predicted by the bank earlier.

From a short-term technical indicators perspective, market sentiment has become extreme, and the Hang Seng Index is currently approaching the oversold range, touching the lower end of the 20-day trading range. The risk premium has risen to 8.7%, the highest since late April, 1.5 times the standard deviation above the historical average in 2010, and the short selling ratio has risen to the highest level since early April of 19%. From the perspective of the reasons, the chaos and volatility of external assets such as the sharp decline in US stocks and the obvious appreciation of the yen undoubtedly caused disturbances through emotional and trading factors (such as the unwind of hedge fund trading long and short positions), but domestic growth and policy expectations have also failed to provide effective hedging, as can be seen from the weaker performance of A shares.

China International Capital Corporation Limited believes that the special nature of the current interest rate cut cycle and the race in the market make the impact of interest rate cuts on assets more forward-looking. When the interest rate cut is realized, it may be nearing the end of the loose trading. For the Chinese market including the Hong Kong stock market, the impact of the Fed's interest rate cut is indirect and secondary. Domestic fundamentals are more important. During the Fed's interest rate cut period from July to September 2019, the market remained volatile in a weak recovery environment, and the US bond interest rate in the fourth quarter of last year fell from a high point of 5% to 3.8%, but A shares and Hong Kong stocks showed a weak trend at the same period, which illustrates that domestic growth factors are more important to the market. Therefore, discussing the impact of the Fed's interest rate cut on Hong Kong stocks without the domestic fundamentals has limited significance.

China International Capital Corporation Limited believes that although the current interest rate cut of the People's Bank of China and the issuance of ultra-long special treasury bonds are correct, they are undoubtedly positive, but in the short-term weak growth environment, the strength and intensity of policy stimulus still need to be strengthened. According to calculations by the bank, an increase of 4-5 trillion yuan in fiscal spending and a reduction of 75 to 100 basis points in the 5-year LPR may solve this problem. In comparison, recent interest rate cuts and new measures for equipment upgrades are undoubtedly positive, but they are relatively small in scale.

In summary, under the benchmark scenario, the bank believes that the expectation of strong stimulus is still unrealistic, and various internal and external constraints make it difficult for policies to be presented in a 'complete' way. Therefore, the market is more likely to maintain a structural market under the pattern of volatility, but after the significant correction in the near future, the market has approached the support level of the weekly and monthly lines. Therefore, if there is no unexpected impact, it may stabilize at this position.

In terms of allocation, under the short-term overseas interest rate cut trading, growth sectors benefiting from the denominator logic may have higher elasticity, such as semiconductors, automobiles (including new energy), entertainment media, software, biotechnology, etc. Conversely, high dividends may run behind in stages, but this does not change the overall allocation pattern. Overall, the bank still follows the allocation logic in the second half of the year, recommending three directions in the structural market: downward overall return (high dividends with stable returns and high buybacks, that is, 'cash cows' with abundant cash flow), partial leverage (technological growth related to new and high-quality production capacity), partial price increase (monopoly sectors, upstream and public utilities).