Last week, the Hong Kong stock market continued to decline, which is consistent with our previous emphasis on increasing short-term disturbances, and we recommend maintaining a cautious judgment. In the short term, external pressures and geopolitical disturbances appear to be the main reasons for the market's sudden downturn. However, fundamentally, it is still due to the market itself being in a certain "weak balance" between expectations and policy fulfillment. Specifically, there are three common "expectation gaps" in the current market:
"Expectation Gap" One: the positive expectations of domestic stimulus in the market. We calculated that the additional fiscal expenditure of 7-8 trillion yuan would help address the contraction issue, but the "reality constraints" of high leverage, interest rates, and exchange rates mean that while there will be incremental stimulus, excessively high expectations are not realistic. The recent addition of a 6 trillion yuan local government debt limit for the next three years may bring additional increments if the central economic work conference following will raise the general public budget target, but it is still some distance away from the aforementioned scale.
"Expectation Gap" Two: a simple reference to the experience of dealing with the last round of tariffs. The current policy thinking and macro environment are vastly different from the previous round: 1) Stronger grasp of political resources: in this round, Trump has absolute control over the party, Congress, and public opinion resources; 2) Last term: with no re-election aspirations and pursuit of future political legacy, his governance approach differs from the first term; 3) Core team and the positions of the younger generation in the Republican Party: the recent nominees to the cabinet have political views that are highly consistent with Trump and the Republican manifesto. In addition, there are several differences compared to 2018 that should not be overlooked: 1) Greater trade dependence; 2) Limited exchange rate hedging tools; 3) Changes in the new round of trade policy.
"Expectation Gap" Three: the loose expectations of Trump's alliance strategy with the Biden administration after taking office. One interpretation in the market is the expectation that Trump will break the United States' alliances established during Biden's term. However, whether Trump's approach will change in his second term, especially key hawks in his team responsible for foreign policy, may lead to unexpected changes in the situation that also need attention.
In terms of allocation, caution remains dominant in the short term, with around 19,000 points being critical.ResistanceUnder the assumption of an overall oscillating pattern, the shift to the structure of 'gradually laying out on the dull left side and moderately taking profits on the excited right side' seems to be an effective strategy. In terms of industry, we recommend focusing on three categories: industry clearance, policy support, and stable returns.
Market trend review
Impacted by overseas geopolitical disturbances and cooling expectations of domestic policies, the Hong Kong stock market further declined last week, with the Hang Seng Index falling by 1.9% on Friday alone. In terms of indices, the MSCI China, the Hang Seng Enterprises Index, and the Hang Seng Index fell by 1.8%, 1.3%, and 1.0% respectively, while the Hang Seng Tech Index dropped by 1.9%. At the sector level, all sectors experienced declines, with consumer discretionary (-3.6%), real estate (-3.2%), insurance (-3.0%), and transportation (-2.8%) leading the losses, while information technology remained unchanged from last week.
Chart: Last week, the MSCI China Index fell by 1.8%, with consumer discretionary, real estate, and insurance leading the decline.
Market Outlook
Following a significant drop of over 5% in the hang seng index last week, the market further corrected this week. On Friday, due to multiple external disturbances, there was a selling wave, with the csi 300 index in the A-shares falling more than 3% in one day, and the hang seng index in Hong Kong dropping nearly 1.9% in a single day. It has now fallen below the daily line.ResistanceIt has dropped to (19,500), approaching the weekly and monthly resistance levels (18,900-19,200), effectively erasing all gains since "924" and returning to the level at the start of the significant rise on September 25. Meanwhile, overseas active and passive funding outflows further expanded this week, with active funding outflow of 0.54 billion USD, an increase of nearly 60% compared to last week's outflow of 0.34 billion USD, and passive funding outflow of 1.57 billion USD, close to double last week's outflow of 0.81 billion USD. After this week's correction, the proportion of short sales in Hong Kong stocks has risen to 17.5%, with 5-day short sales accounting for 16.7%, returning to early September levels; at the same time, the 14-day relative strength index.RSIFell back to 38.1, close to being oversold.
Chart: The Hang Seng Index risk premium has recently risen to around 7.7%, reaching the highest level of 7.8% during the escalation of the trade friction in 2018.
Chart: The short selling turnover in Hong Kong stocks has recently risen to 17.5%.
Chart: The Hang Seng Index's 14-day RSI indicator is close to oversold levels.
Last week we suggested that with the increasing external disturbances in the short term, it is advisable to remain cautious, not ruling out further amplification of volatility ("What is the outlook after the pullback?"). In fact, the recent trend over the past period has essentially validated our market analysis: during the last round of market performance reaching its peak in early October, we indicated that the short-term market considerations were relatively sufficient. If the HSI corresponds to 22,500 by early 2023, sentiment would be included (September 29"Market Space Under the New Policy"), whereas in the "Hong Kong Stock Market Outlook for 2025: Overcast but not Raining," we proposed that under the benchmark scenario, we believe that the Hong Kong stock market has not completely broken free from the oscillating pattern, "Rebounds are intermittent, structures are the main theme", gradually positioning on the subdued left side and appropriately taking profit to shift towards the structure on the exuberant right side, seems to be a repeatedly successful strategy.
In the short term, external pressures and geopolitical disturbances seem to be the main reasons for the market's sudden downturn. Some tense geopolitical situations and the U.S. imposing related investment bans have intensified market concerns about external uncertainties; at the same time, recent reactions to external pressures at domestic meetings have cooled down some investors' expectations for the next policy steps. However, fundamentally, the amplifying effect of these 'excuse-finding' attributions on emotions is because the market itself is in a certain 'weak balance' between expectations and policy realization. Specifically, there are generally three 'expectation gaps' currently present in the market, which is why we repeatedly emphasize in the "Hong Kong Stock Market Outlook for 2025: Overcast but not Raining" that the Hong Kong stock market has not completely broken free from the oscillating pattern, with "Rebounds are intermittent, structures are the main theme" being the fundamental reason.
► "Expectation Gap" one: Positive expectations for domestic stimuli in the market previously.
It is undeniable that we can clearly see the shift in policy stance at the end of September is an indisputable fact, leading to a sharp rise at the beginning of October. However, in such optimistic expectations, whether there will be further substantial policy initiatives to provide new support becomes a key factor influencing the market trend in the following months. In our 'Hong Kong Stock Market Outlook 2025: Regardless of the Clouds, Rainfall' report, we highlight that the root cause of all issues such as declining demand, low inflation, weak credit, and resulting lackluster profits is credit contraction. The most effective way to address this issue is through fiscal intervention. Whether it is indirect debt monetization or direct demand stimuli, a substantial scale is necessary. We estimate that an additional 7-8 trillion yuan in fiscal expenditure would help resolve the contraction issue. However, the 'real constraints' of high leverage, interest rates, and exchange rates mean that while there will be incremental stimuli, overly high expectations are not realistic. Looking at recent incremental policies, the addition of a 6 trillion yuan local government debt limit over three years equates to two trillion yuan per year. If the upcoming Central Economic Work Conference raises the general public budget target, it may bring additional increments (we calculate that a 1% increase in the deficit ratio corresponds to around 1.3 trillion yuan), but this is still a bit short of the aforementioned scale, further emphasizing this point.
> Chart: Exchange rates are a significant hedging channel for tariffs. During the 2018-2019 China-US trade friction, the RMB depreciated by over 11% at one point.
At the same time, the continuous repair of fundamentals also requires more incremental policy support. Although the policy shift at the end of September and the subsequent stable growth policy initiatives drove the marginal recovery of economic and financial data in October, entering November, high-frequency data shows signs of recent economic activity weakness again: 1) On the production side, blast furnace operating rates and rebar operating rates both weakened compared to the previous week; 2) In terms of prices, pork and fresh vegetable prices declined month-on-month, with the Nanhua industrial product index, rebar prices, copper prices, among others, showing varying degrees of decline compared to the previous week; 3) In the real estate sector, the transaction area of commercial housing in 30 major cities has continued to weaken in the past two weeks.
► 'Expectation Gap' Two: A Simple Reference to the Experience of Dealing with Tariffs in the Previous Round
As we previously pointed out, when analyzing the impact of the Trump administration's policy approach, a key reference is still the first term from 2017 to 2021. For example, his business experience may make some policies appear tough at the beginning, but in reality, there is room for negotiation, and even the tough stance itself is a negotiation technique. However, we are concerned that to some extent, the current policy approach and macro environment are significantly different from the previous round. If this is true, there may be a risk of the market underestimating its impact ('Deduction of Trump's Policy and Trade Paths'). Firstly, in terms of ruling strategy and political environment: 1) Greater control over political resources: This round of Trump has absolute control over the triple resources of the party, Congress, and public opinion ('Republican Victory', the first time since 2004 that the popular vote has exceeded the Democratic Party), which can better promote his proposals; 2) Last term: No re-election appeal and no pursuit of future political legacy make his ruling strategy different from the first term; 3) Core team and the assertions of the Young Republicans: Whether it is Vice President Pence or recent nominees for cabinet positions, their political positions are highly consistent with Trump and the Republican manifesto, even more assertive, so it is not ruled out that it will influence this term and future policy direction for a longer time.
Additionally, compared to 2018, several differences make the current impact undeniable: 1) Higher dependence on trade, current weak domestic demand, and obvious increase in external demand support to GDP growth. In the first three quarters of this year, China's net exports have contributed to GDP at a cumulative year-on-year rate of 23.8%, of which looking up to October, the US contribution to China's trade surplus reached as high as 37%; 2) Limited hedging tools for exchange rates; in 2018, China could absorb the impact of tariffs through exchange rate depreciation, but the current internal and external environment may constrain it; 3) Changes in new trade policies, focusing more on tariffs and deficits, different from 2018 focus, the current supply chain and re-export trade, after Biden's continuous restructuring and focus over the past four years, have become a focal point. Just as Biden 'inherited' Trump's 25% tariffs, this time Trump may continue Biden's policies on the supply chain.
Chart: The 10-year US Treasury bond yield has risen to 4.4%, and the US dollar against the RMB has risen to 7.25.
► The "expectation gap" three: the loosening expectation of Trump's alliance strategy with the Biden administration after taking office.
Prior to this, Biden's approach to handling geopolitical situations, ally relationships, and even outsourcing in the supply chain mainly reflected an alliance strategy drawn along ideological lines. Therefore, one interpretation in the market is the expectation that Trump will break the relationships with US allies during the Biden era, which may lead to a loosening of the previous alliance strategy. However, whether Trump's approach changes in his second term, especially with key hawkish figures responsible for foreign policy in his team, could potentially result in less drastic changes than expected, which also requires attention.
Looking ahead, we suggest paying attention to several key points to verify the above expectations: 1) The Central Economic Work Conference in December, which will address next year's fiscal budget and deficit arrangements; 2) Trump's official inauguration on January 20 and the first 100 days of the new administration, observing the priorities of different policy agendas; 3) Address to a Joint Session of Congress between February and April, where the new president typically outlines his legislative agenda and national priorities to the US Congress; 4) Release of the 2026 budget between February and April, which may provide more details on key infrastructure, tax reduction, and other legislative proposals.
From an allocation perspective, we believe the market will continue to be dominated by volatility and structural rallies. In the short term, caution remains the priority, but larger fluctuations may bring more stimulus support, presenting potential re-entry opportunities. The 19,000 point level is a key support level. Under the assumption of an overall volatile pattern, transitioning from 'gradually laying out in the downtrend, moderately profiting on the uptrend' to a structured approach seems to be an effective strategy. In terms of sectors, we recommend focusing on three categories: 1) Sectors undergoing supply adjustments and policy cycles clearing, particularly where marginal demand improvements are expected, such as parts of internet-related consumer services, home appliances, textiles, and electronics; 2) Directions supported by policies, including home appliances and automobiles under the 'trade-in old for new' policy, as well as industrial trends in autonomous technology areas like computers and semiconductors; 3) Stable returns, such as high dividend-paying state-owned enterprises.
Specifically, the main logic that supports our above views and the changes that need to be focused on this week are mainly as follows:
President Trump nominated Litanic as Secretary of Commerce and Bessant as Secretary of the Treasury. On November 19, President Trump nominated the head of his transition team, Howard Litanic, to be Secretary of the Treasury, directly responsible for the affairs of the United States Trade Representative's Office (USTR), leading the U.S. tariff and trade agenda. Litanic supports the vision of the Republican Party to bring manufacturing jobs back to the United States. On November 22, Trump nominated Scott Bessant as U.S. Treasury Secretary. Bessant supports the Treasury Department's traditional views, including the importance of a strong U.S. dollar as a world reserve currency; while also supporting deficit reduction, calling for spending cuts and adjusting existing taxes.
Hang Seng Index announced the inclusion of Kuaishou Technology and New Oriental Education in the Hang Seng Index constituents, and Midea in the Hang Seng Tech Index constituents. On November 22, Hang Seng Index Company announced the quarterly review results of the Hang Seng Index series as of September 30, 2024. All changes will be implemented after the close on December 6 (Friday) and will take effect on December 9 (Monday). Among them, Kuaishou Technology and New Oriental Education Technology Group will be included in the Hong Kong Hang Seng Index constituents, while New World Development Co., Ltd. will be removed. Midea will be included in the Hang Seng Tech Index, replacing Weibo.
Texas Governor in the United States announced a ban on Texas institutions from ceasing any new investments in China with state government funds and funds. On November 22, Greg Abbott, the Governor of Texas, wrote to state government agencies, prohibiting Texas investment institutions from making any new investments in China. For existing investments in China, it is required to divest at the earliest practicable time, citing considerations based on financial and security risks.
Overseas active and passive capital outflows are expanding, with accelerated inflows of Southbound funds. Specifically, data from EPFR shows that as of November 20, overseas active funds flowed out of overseas Chinese stock markets expanded to $0.54 billion USD (compared to $0.34 billion USD outflow the previous week), while overseas passive funds saw an outflow of $1.57 billion USD (compared to $0.81 billion USD outflow the previous week). At the same time, Southbound funds inflow slowed to HK$28.33 billion last week, narrowing from HK$35.7 billion inflow the previous week.
图表：海外主被动外资均加速流出
Author: Liu Gang (S0080512030003), Wu Wei, Zhang Weihan, Source: Kevin Strategy Research, Original Title: "Hong Kong Stocks: Three 'Expectation Gaps' in the Current Market"
Editor/ping
