①How does the end of the U.S. government shutdown specifically impact liquidity in the Hong Kong stock market? ②Why are Hong Kong's innovative drug sector and Hang Seng Tech Index considered key beneficiaries under improved liquidity conditions?
Recently, the Hong Kong stock market has once again become a focal point for investors. Influenced by both external liquidity changes and the approach of a key policy window, market sentiment has undergone subtle shifts. The latest research report from Western Securities points out that with the end of the U.S. government shutdown, previously 'frozen' dollar liquidity is expected to be released, potentially driving a liquidity-fueled rally in the Hong Kong stock market.
On Friday, amidst an overall pullback in the Hong Kong stock market, the pharmaceuticals and biotechnology sector demonstrated resilience, rising against the trend once again. As of the time of writing, $VIGONVITA-B (02630.HK)$surging over 25%, $ASCLETIS-B (01672.HK)$ Up more than 16%, $SIRNAOMICS-B (02257.HK)$ 、 $CSTONE PHARMA-B (02616.HK)$ 、 $LAEKNA-B (02105.HK)$ All rose significantly by more than 10%.
The reopening of the U.S. government marks a critical turning point for global liquidity.
During the U.S. government shutdown, fiscal expenditures were nearly halted, while revenues such as taxes continued to flow into the Treasury General Account (TGA), creating a 'one-way inflow' scenario that temporarily locked up nearly a trillion dollars in liquidity. This situation increased the cost of dollar funding and also weighed on risk assets such as U.S. stocks and Hong Kong stocks.
As the government reopens, the 'locked' liquidity will be reinjected into the market. Western Securities noted that the decline in the TGA account balance will serve as an important signal for liquidity to shift toward easing, helping to alleviate the recent tightness in global dollar liquidity.
Meanwhile, the non-farm payroll data, which has been suspended for two months, is set to resume publication. The release of this data could act as a catalyst for heightened market expectations of interest rate cuts. On one hand, the government shutdown itself may drag down employment figures and weaken consumer spending by reducing the number of government employees and delaying salary payments. On the other hand, signs of economic weakness provide the Federal Reserve with justification for a policy pivot. Once expectations of interest rate cuts strengthen, the dollar liquidity environment will further improve.
After the Treasury Department resumes normal expenditures, the easing trend in dollar liquidity is expected to solidify, with the spread between overnight rates and reserve interest rates likely to return to negative territory. This will reverse the pessimistic trading logic caused by earlier liquidity strains and create conditions for rebounds in risk assets such as Hong Kong stocks.
Which sectors of Hong Kong stocks will benefit first?
In the context of marginal easing in liquidity, which assets will rebound first? Western Securities pointed out that Hong Kong stocks, being a market with highly free capital flows, are extremely sensitive to dollar liquidity and have historically served as a 'leading indicator' for shifts in capital flows. Among them, sectors that have undergone significant adjustments and are sensitive to interest rates exhibit greater elasticity.
Specifically, innovative pharmaceuticals in Hong Kong stocks and the Hang Seng Tech Index have become key areas of focus.
In terms of adjustment magnitude, the Hong Kong innovative pharmaceuticals index has retreated by nearly 20% since September, with some leading individual stocks falling more than 30%; the Hang Seng Tech Index has also dropped over 10% since October. Both indices have fallen back to near their six-month lines and are showing signs of stabilization. Last week, the Hong Kong innovative pharmaceuticals sector had already begun to rebound.
Western Securities believes that the innovative pharmaceuticals sector is highly sensitive to financing environments. If expectations for Federal Reserve interest rate cuts rise, it will directly alleviate corporate financing pressures and drive valuation recovery. From a fundamental industry perspective, Chinese biotech companies’ research pipelines rank second globally in scale, and several innovative drugs and new indications are expected to come to market in the coming years, catalyzing both performance and stock prices. On the policy front, the introduction of commercial insurance catalogs in national health insurance negotiations will also help accelerate the commercialization of innovative drugs.
The movement of the Hang Seng Tech Index is highly correlated with the US Dollar Index. At the beginning of October, the rapid rise of the US Dollar Index caused the sector to shift from volatility to decline. As upward momentum in the US Dollar Index weakens, liquidity shifts are expected to drive a recovery in the sector.
Has the window for positioning opened?
From the perspective of time and space, the Hong Kong innovative pharmaceuticals sector has undergone an adjustment period of about two months, while the Hang Seng Tech adjustment has lasted over one month. Both have reached their six-month line support levels. Western Securities points out that because the innovative pharmaceuticals sector adjusted earlier than the Hang Seng Tech and has already initiated a rebound, the catch-up rally for the Hang Seng Tech is also likely to follow, suggesting that the current position may have entered the bottom region.
Considering the threefold factors of easing liquidity, sector rotation, and industrial logic, Hong Kong stocks—particularly in the innovative pharmaceuticals and technology sectors—are ushering in an important allocation window. As the turning point in US dollar liquidity approaches, a valuation recovery rally may be imminent.
Editor /rice
