Source: CITIC Securities Research

▍ Incidents:

Since January 14 this year, Hong Kong stocks have continued to rise, benefiting from the explosion of DeepSeek and domestic policy expectations. But yesterday at noon, $Hang Seng TECH Index (800700.HK)$ The decline occurred after breaking through the intraday high on October 7 last year, which also led to an overall correction in Hong Kong stocks. We believe that the decline in Hong Kong stocks yesterday was due to the short-term settlement of investors' profits. From a global perspective, the cost performance ratio of Hong Kong stocks is still remarkable.

▍ DeepSeek came out of nowhere, and the two meetings are expected to catalyze a sharp rise in Hong Kong stocks since mid-January.

On January 20 of this year, DeepSeek released the R1 model, which drastically reduced the training cost of AI models, and its model capabilities are close to the latest model of the American AI leader. Combined with the subsequent rapid deployment of relevant AI models by Chinese companies, and $BABA-W (09988.HK)$ versus $Apple (AAPL.US)$ News such as the cooperation all showed the good interaction between the domestic AI training side and the application side. In the same period, global investors questioned whether the huge capital expenditure of US tech giants in the AI field could deliver on their performance.

Also, closer to March, policy expectations from the National Conference began to be reflected, and expectations for consumer support policies further supported sentiment in the technology and consumer sectors of Hong Kong stocks. From January 14 to February 12, the Hang Seng Index and Hang Seng Technology rose by 14.1% and 25.1% respectively. At the industry level, IT (26.2%) and optional consumption (22.7%) led the way.

▍ The imposition of US tariffs continues to be implemented, and the hawkish attitude of the Federal Reserve suppresses the performance of US stocks.

In addition to putting pressure on the US stock technology sector with the launch of DeepSeek, the tariff policy that Trump has continued to introduce since February this year has further suppressed the performance of US stocks, including the imposition of 10% tariffs on Chinese goods, the postponed 25% tariff on Canada and Mexico, and the announcement on February 10 that a 25% tariff on steel and aluminum imported into the US will be imposed, putting pressure on US stock performance expectations in 2025.

Compared with the US stock performance forecast for February 7 and January 24 this year (Bloomberg's agreed forecast, same below), S&P 500's net profit and revenue expectations for 2025 were lowered by 0.5%/0.1%, respectively, while the NASDAQ 100 was lowered by 0.6%/0.2%, respectively. Furthermore, the US CPI reading in January surpassed Bloomberg's unanimous market expectations, and Powell's hawkish statement at the congressional hearing also suppressed US stocks.

▍ With the price-performance ratio of Hong Kong stocks highlighted, foreign capital has returned nearly HK$13 billion since January 24.

Unlike the decline in US stock performance expectations during the above period, Hong Kong stock performance expectations for 2025 during the same period are relatively stable, and valuations are still at a historically low level. As of February 13, the PE of the Hang Seng Index was 9.8 times (historical 28.8% quantile), and although Hang Seng Technology hit a new high after the pandemic, PE was only 17.4 times (historical 26.5% rank), not only 19.0 times the high on October 7, 2024, but also significantly lower than 26.3 times the January 27, 2023 high.

Furthermore, from an industry perspective, between 2019 and 2022, the PE level of Hong Kong and US stocks in the consumer and technology sector was relatively close, but since then, the valuation premium of US stocks compared to the corresponding Hong Kong stock industry has continued to widen. Currently, the dynamic price-earnings ratio of the Hong Kong stock consumer industry is only half that of US stocks. The valuation of the information technology industry is also discounted by more than 30% compared to US stocks, so the horizontal cost performance ratio is remarkable. However, since January 24, foreign capital has flowed into Hong Kong stocks of HK$12.76 billion, which coincides with the correction of US stocks, and mainly into the relatively undervalued consumer and technology industries.

▍ Although the share of short sales has declined, it is still at an all-time high.

In addition to the return of foreign capital and net purchases of HK$6.1 billion per day from the beginning of the southbound year to February 12, the recent liquidation of short positions was also one of the main drivers of the rebound in Hong Kong stocks. However, as of February 7 this year, the total amount of unclosed short sales in the Hong Kong stock market was still at a high level of 1.37% of the market value in circulation (more than double the standard deviation from the historical average since the beginning of 2023).

At the industry level, the proportion of unclosed positions in healthcare (2.1%), daily consumption (1.8%), and raw materials (1.5%) is currently relatively high. However, compared to the high phased short selling period on October 8 of last year and January 13 of this year, industries with a large proportion of short positions closed are optional consumption, raw materials, and finance. In the same period, the share of short positions increased significantly, but was concentrated in dividend-based communication services, utilities, energy, and industrial sectors affected by the new round of tariffs.

▍ The MSCI position adjustment is imminent at the end of February. Hong Kong stocks may face the risk of a profit settlement, but the trend will not reverse throughout the year.

Since the last MSCI position adjustment came into effect in 2024 (that is, November 26, 2024) to February 12, 2025, the Hang Seng Index has accumulated a cumulative increase of 14.1%, and Hengke surged 25.1%. Over the same period, the MSCI Global Index and the Emerging Markets Index rose only 1.6%/2.2%, respectively. Looking back at the adjustment period from August to November 2024, the performance of the Hong Kong stock market was also significantly superior to the MSCI Index (global and emerging markets), but declined on the first two trading days of the effective date of the adjustment period.

Furthermore, if the Trump administration announces further tariffs, it is not ruled out that Hong Kong stocks may face a profit pullback at the end of February. However, looking at the whole year, against the backdrop of a gradual recovery in domestic economic fundamentals, combined with the price-performance ratio of valuations, we are still optimistic that Hong Kong stocks will continue to reverse the market since 2024.

Edit/rice