Tianfeng Securities released a research report that the Hang Seng Index is still in a state of low volatility and low turnover, so caution may be necessary for the short-term Hong Kong stock market situation. Looking ahead, Hong Kong stocks have stimulated a significant rebound amid the significant improvement in both domestic and foreign sentiment. Sustainability and upward potential are waiting to be accompanied by more solid fundamental data. During the period of economic recovery verification, we remain cautiously optimistic. In terms of allocation, on the one hand, sectors with high dividend yields such as utilities, energy, finance, and telecommunications are expected to provide considerable relative returns in this environment even if market volatility rises in the future; on the other hand, the technology industry represented by semiconductors and the internet will still be the main driving force for industrial transformation and is expected to benefit from government support and domestic substitution.

1) Hong Kong stocks continued to weaken, and the utilities sector rose against the trend. From July 22 to July 26, against the background of active positioning by significant conferences and the easing policy of the central bank, the previous weakness of Hong Kong stocks was not effectively curbed, and most broad-based indexes fell one after another. Market turnover remained low, and the Hang Seng Index and the Hang Seng Technology Index fell by 2.3% and 2.6%, respectively. At the style level, high dividend yields and state-owned enterprise indicators resisted the decline, while mid and small caps fell sharply; at the strategy level, the precision index of AH shares on the Shanghai-Shenzhen-Hong Kong Stock Connect performed better than risk control and multi-factor strategies; at the industry level, only the utilities sector recorded a small increase (+0.4%), while raw materials and essential consumption fell more than 5%;

2) Marginal improvement in industrial enterprise profits. From January to June 2024, industrial enterprises achieved a total cumulative year-on-year increase of 3.5% in profits, with a quarter-on-quarter increase of 0.1 percentage points. Although the contribution of quantity factors to profit improvement is gradually narrowing, that is, the cumulative growth rate of industrial value-added has continued to decline month-on-month to 6.0% for two consecutive months, the support effects of prices and profit margins are gradually emerging. After PPI reached its bottom in the third quarter of last year, it has maintained an upward trend overall, and the degree of negative growth has continued to converge. The cumulative growth rate in June recorded -2.1%, the largest value in nearly a year; the cumulative revenue profit margin in June reached 5.4%, an increase of 0.2 percentage points from the previous month, which was the same as the same period last year. If the stable state of relevant indicators is further strengthened, the enthusiasm for enterprise production may be boosted;

3) The trading support factors for Hong Kong stocks are still relatively limited. Although positive factors such as economic data, important conferences, and policy issuance have appeared in the past two months, it is still difficult to reverse the downward trend of Hong Kong stocks since May 20, and in the absence of explanatory fundamental factors, coping measures at the trading level are particularly important. When the Hang Seng Index is in a low volatility and low turnover state, it usually lacks a bright market, and reducing positions should be the main choice at this time. It is observed that the Hang Seng Index is still in a state of low volatility and low turnover, so caution may be necessary for the short-term Hong Kong stock market situation.

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.

Edited by Jeffrey