In our report “Trading Activity Still Under Pressure — Hong Kong Stock Exchange Monthly Tracking (August 2024)” released on September 12, we proposed that the Federal Reserve's interest rate cut in September was basically determined. While the financial side was relaxed, it also brought some room for operation to domestic monetary policy, and wait for the activity of Hong Kong stocks to increase after a steady recovery in domestic fundamentals.

On September 18, the relaxation of overseas liquidity took the lead, and the Hong Kong stock market reacted positively. On September 18, the Federal Reserve officially launched the interest rate cut cycle, and the rate cut by 50 BP slightly exceeded market expectations. The Hong Kong stock market reacted positively. The ADT reached HK$150 billion on the three trading days from September 19 to 23, a sharp increase of 57% over the previous 20 trading days.

Yesterday, a series of domestic measures to “stabilize the economy” were introduced, and molecular factors suppressing activity in the Hong Kong stock market have also improved simultaneously. The turnover of Hong Kong stocks reached HK$242.4 billion on September 24, a sharp increase of 1.54 times compared to ADT in the 20 trading days before the Federal Reserve cut interest rates.

As of September 24, the year-to-date ADT on the Hong Kong Stock Exchange was HK$107.4 billion, +2.3% compared to the full year of 2023.

We estimate that if the Hong Kong Stock Exchange ADT is at the level of HK$150 and HK$200 billion in the fourth quarter, ADT could reach HK$118.1 and HK$130.6 billion respectively in 2024, up 12% and 24% respectively from 2023. Based on this, it is estimated that the Hong Kong Stock Exchange's 2024 annual results can increase by 5% and 8% year-on-year to HK$12.5 and 12.8 billion respectively, reaching the 2021 performance level.

Currently, favorable factors at home and abroad resonate, and the Hong Kong Stock Exchange still has sufficient upward flexibility. Previously, Hong Kong stocks had taken too many pessimistic factors into account, driving the Hong Kong Stock Exchange stock price to continue to decline. PE valuation once fell below its lowest level since 2018, and the bottom characteristics were obvious. Even though the Hong Kong Stock Exchange has rebounded 15% from the bottom, the current PE-TTM valuation is only 28×PE, which is in the 9.8% quantile up since 2018. Referring to the market from November 2022 to the beginning of 2023, the Hong Kong Stock Exchange rebounded 81% from the bottom due to the resonance of expectations of interest rate cuts from the Federal Reserve and expectations of a reversal in domestic policies. Overseas liquidity has improved substantially this time, and expectations of increased domestic economic support policies are heating up, and there may be plenty of room for a rebound. Furthermore, compared with the index, the current rebound in the Hong Kong Stock Exchange is significantly more flexible than the Hang Seng Technology Index. Since the interest rate cut on September 18 to the close of trading on September 24, the Hong Kong Stock Exchange and Hang Seng Technology have increased cumulatively by 14.9% and 10.7% respectively.

Investment advice: We slightly raised the Hong Kong Stock Exchange profit forecast. We expect net profit to be 12.486, 13.004 and 14.086 billion HK$14.086 billion for 2024-2026, respectively, +5.26%, +4.15%, and +8.32% year-on-year respectively. The stock price on September 24 corresponds to 2024 26.28×PE, maintaining a “buy” rating.

Risk warning: risk of a recession in the US economy; domestic economic recovery falls short of expectations; Hong Kong stocks are affected by the black swan incident.