Recently, the Hong Kong stock market continued to fluctuate, with the Hang Seng Index currently above 19,000 points. China International Capital Corporation pointed out that in the short term, the Hang Seng Index still has support at 19,000 points, but the upside momentum is limited due to ongoing external uncertainties.

Recently, the Hong Kong stock market has been greatly affected by external disturbances.

Compared to A-shares, the Hong Kong stock market has experienced a greater pullback from its peak. Looking only at the indices, the Hang Seng Index has fallen back to the level of September 24th, while the Shanghai Composite Index still has a considerable distance to go. The reasons for this are twofold: Hong Kong stocks are particularly sensitive to external disturbances, especially the 'Trump trade,' and the change in sentiment of foreign capital is more drastic than that of domestic investors, which can be seen from recent changes in the funding environment.

In a previous research report, China International Capital Corporation mentioned that during the rebound from the end of September to early October, overseas passive (mostly individual) and transactional funds (mainly hedge funds) were the main forces, but they were more speculative. On the contrary, the more important active long-term funds flowed in less, and many of them were to avoid underperforming rather than actively increasing positions.

During the recent pullback, overseas funds flowed out again, especially active funds flowing out more, further indicating this point. In terms of allocation, as of the end of October, the proportion of overseas active funds allocated to Chinese stocks has once again decreased, returning to the level of April this year.

The 19,000 points level of the Hang Seng Index is quite critical.

According to a research report from China International Capital Corporation, around the 19,000 points level of the Hang Seng Index is a key support level where the daily, weekly, and monthly lines converge. If unexpected risks arise causing the market to break below this level, it will face greater pressure; otherwise, it will find support. The market did indeed rebound after touching this level early last week.

At the same time, China International Capital Corporation believes that excessive expectations for domestic policies are not realistic. For example, Trump recently stated on social media that on his first day in office, he would impose a 25% tariff on all products entering the U.S. from Mexico and Canada, and would further impose a 10% tariff on Chinese products. While a 10% tariff seems much better than the previous 60% claim, the market reacted very flatly that day because there is disagreement on the basis of this tariff percentage and also because the market does not believe that 10% is the end of it.

Therefore, in the short term, the market at this position is undecided, it could go up or down, it is suggested that investors control their positions well, and the possible paths are as follows:

Under the assumption of moderate and limited domestic policy efforts, if tariffs are gradually increased, for example, initial tariffs at 30-40%, which is an additional 10-20% on top of the current 19%, China International Capital Corporation expects limited market impact. This is because this tariff level basically meets the current market consensus expectations, and its actual impact is relatively controllable, requiring a rise in deficit rate of about 0.5-0.7% to cope with it ('Possible Paths and Impacts of Tariff Policies').

Therefore, the market's reaction at that time may be more similar to the third round of tariffs in April 2019. At that time, after experiencing the continuous decline of the 2018 trade friction and the rapid recovery rebound in early 2019, the market was prepared for tariffs. Meanwhile, under the continuous loose policy offset, growth in 2019 gradually stabilized, so after the unveiling of the third round of 200 billion US dollars with 25% tariffs in April, the market, although still turbulent, maintained a range of shocks. In this situation, it is recommended that investors maintain the current range-bound trading strategy.

If the maximum 60% tariff is imposed, due to the inadequate market pricing and the actual impact will increase nonlinearly, the market may face significant disruptions. Currently, the market's expectation for the final imposition of a 60% tariff is still insufficient and the pricing is not adequate (a Reuters survey shows that the market mostly expects tariff levels in the 30-40% range); at the same time, in the scenario of calculating the 60% maximum levy, the deficit rate needs to rise by 1.5%-2% to offset the drag on GDP from exports ('Possible Paths and Impacts of Tariff Policies').

Due to the greater dependence on foreign countries, the limited space for exchange rates to absorb tariffs, and more attention from the United States on re-exports, the impact of high tariffs may be magnified. However, if there is a significant fluctuation at that time, they believe that it may actually provide a better buying opportunity, after all, compared to the current 'neither up nor down' level, a sufficiently cheap buying opportunity can also hedge against risk disruptions, that is, the chance to buy at a lower level.

If domestic policies exceed expectations in the short term, the market may intermittently rise, but from a long-term perspective of 'real constraints', it is recommended that investors partially take profits and shift towards structural investments in this situation. In fact, one of the important reasons for the rebound last week was the market's warming expectations for subsequent policies, whether the significant increase in the general public budget deficit rate announced during the December economic work conference and the further increase in consumer stimulus measures, or news of further RRR cuts and the establishment of a stabilisation fund, could all cause short-term sentiment to rise. However, considering the overly strong policy expectations under 'real constraints' is not realistic, it is recommended that investors take moderate profits after the rise and shift towards structure. 'Gradually lay out on the low side, take moderate profits on the high side' moving towards structure, still remains an effective strategy.

China International Capital Corporation: The market as a whole has not yet broken free from the range-bound situation.

In terms of allocation, China International Capital Corporation believes that the market as a whole has not yet broken free from the range-bound situation, caution should still be the primary focus in the short term, but greater volatility may bring more stimulating support and also provide opportunities for re-entry. Future key focuses: the economic work conference and political bureau meeting at the end of December, the priority of policy advancement after Trump's inauguration in early January, especially the speed and intensity of tariff policy.

Under the assumption of an overall volatile pattern, it is recommended to focus on three types of industries: first, sectors with sufficient self-supply and policy environment clearing, with better marginal demand improvement effects, such as internet-related consumption services, household appliances, textiles, and electronics. Second, policy-supported directions, such as household appliances and automobiles under the policy of replacing old with new, as well as the industrial trends in independent technology fields like computers and semiconductors; third, stable returns, such as high dividends from state-owned enterprises.

Editor/ping