After experiencing a sharp rise yesterday, the Hong Kong stock market welcomed a sudden change this morning. $Hang Seng Index (800000.HK)$Dropping more than 4%, $Hang Seng TECH Index (800700.HK)$ Dropping more than 6%, both brokerage and real estate stocks plunged. So, what happened?

Firstly, JPMorgan analyst pointed out in the report that the current valuation level of Chinese property stocks has already reflected an operating environment quite similar to before the Evergrande crisis erupted, which is unreasonable. The Hong Kong stock market, which is led by foreign capital during the holidays, may gradually return to rationality.

Secondly, the stock market in Japan surged today, showing a clear seesaw effect. Meanwhile, the USD has recorded four consecutive gains, and expectations for the US interest rate seem to be changing once again.

Thirdly, the recent rapid and significant rise in Hong Kong stocks, some large cap stocks such as Tencent, Xiaomi, etc., have reached valuation levels close to their respective blue chip stocks in the US, which may also trigger some concerns from foreign investors.

Suddenly a big plunge.

After yesterday's surge in Hong Kong stocks, today's morning session saw a significant plunge.

In the report on Wednesday, JPMorgan analysts pointed out that the current valuation level of Chinese property stocks already reflects an operating environment comparable to before the Evergrande crisis, which is unreasonable. Yesterday, the surging property and brokerage stocks experienced a sharp decline. Country Garden, $CHINA AOYUAN (03883.HK)$,$SHIMAO GROUP (00813.HK)$and$SUNAC (01918.HK)$ Real estate stocks in various areas collectively experienced a significant drop, with a decrease of around 20%. Citic Securities fell more than 12%, and the Southern Technology Innovation Board 50 ETF experienced significant short-term volatility.

It is worth noting that today, the Hong Kong and Japanese stock markets have once again formed a seesaw effect. Yesterday, the Japanese market saw a significant drop while the Hong Kong market surged; today, the Japanese market surged with a decline in the Hong Kong market. It seems that there is a force competing for capital. Chief Cabinet Secretary Hirokazu Matsuno of Japan stated that Fumio Kishida and Taro Kono have confirmed that the Japanese government and the central bank will continue to cooperate according to the agreement. Kishida mentioned that specific monetary policies are determined by the Bank of Japan.

In addition, although Chinese assets have recently surged, it is important to note that despite the Federal Reserve lowering interest rates, the US dollar index has recently seen four consecutive increases. Furthermore, on Wednesday local time, the latest announcement of private sector job additions in the United States in September exceeded expectations, putting pressure on the market's expectation of a significant 50 basis point interest rate cut by the Federal Reserve in November.

On the other hand, after a significant rebound in the Hong Kong stock market, valuations are also rapidly rising. The valuations of some blue-chip stocks are not far from those of US blue-chip stocks.$TENCENT (00700.HK)$such as its PE (TTM) is 25.72 times, while $Meta Platforms (META.US)$ The PE (TTM) is only 28 times. $XIAOMI-W (01810.HK)$ The PE (TTM) is 28 times, $Apple (AAPL.US)$ while it is 33 times. The valuation constraints of large cap stocks may have already emerged.

What will happen next?

So, is the rebound of Hong Kong stocks at this point a break or an end? I believe most people would think this is just a break. First of all, although Hong Kong stocks corrected today, A50 still maintained its relative strength, as this index turned green despite the sharp drop in Hang Seng Tech, but quickly recovered. Secondly, although big banks like JPMorgan are not very bullish on real estate, according to the latest data from the Hong Kong Stock Exchange, on September 26, JPMorgan increased its shareholding.$PING AN (02318.HK)$The increase amounted to approximately 39.861682 million shares, priced at HK$44.4327 per share, with a total amount of around HK$1.771 billion. The latest number of shares held after the increase is approximately 0.617 billion shares, with a latest shareholding ratio of 8.28%. Furthermore, JPMorgan has also upgraded its rating on China Galaxy H shares to overweight, with a target price of HK$12.59 per share, representing a 39% increase.

HTSC believes that in terms of incremental funds, firstly, there is a global influx effect of foreign capital; it is estimated that as of the end of the second quarter, Chinese stocks accounted for 1.3% in the equity portfolios of the world's top twenty asset management institutions (including mutual funds/hedge funds/trusts), which is 1.9 percentage points lower than the weight in the MSCI ACWI China benchmark; if the expectation improves, foreign investment returning to the first quarter level of underweight by 1.7 percentage points may bring about a net inflow of around 17 billion US dollars from top asset management institutions; and returning to the median level of 2018-2020 of underweight by 0.5 percentage points may bring about a net inflow of around 100 billion US dollars. Secondly, there is a effect from covering existing short positions; despite the fact that since September, the proportion of short-selling transactions on the Hong Kong stock market has been at historically low levels, the number of outstanding short positions in the entire market has not decreased significantly, and the force to cover existing short positions has not been fully released.

In addition, market research institution DataTrek Research stated that if history is any guide, there may still be significant room for growth in this current uptrend. The institution mentioned that by comparing the relative performance of iShares Core MSCI China Index ETF (FXI) and SPDR S&P 500 Index ETF Trust (SPY) within a 100-day timeframe, during times of positive policy shifts such as in 2009, 2015, and 2023, Chinese stocks have outperformed US stocks by over 30 percentage points, while currently leading by only 13 percentage points.

Analysts believe that the future prospects of the Hong Kong stock market may depend on the popularity of A-shares on one hand and the movement of the US dollar on the other. In the recent surge of Chinese assets, the US dollar has strengthened too much, and the Federal Reserve is still tapering its balance sheet. This means that offshore US dollar liquidity is not as loose as imagined. Hence, the aforementioned seesaw effect may occur. If the Hong Kong stock market rises too sharply and valuations increase too rapidly, fluctuations will naturally occur.

Editor/Somer