Source: Chen Li lichen
Authors: Chen Li, Chen Meng, Ge Xiaoyuan
After reaching the high point in October last year, the Hong Kong stock market did not adjust, but continued to rise, breaking through the past three years' experience. Can this "mid-air refueling" be sustained? What catalysts may drive the rise in the future?
1. A rise leads to a greater rise. A large number of investors, based on past experience, either take profits or open short positions when the Hang Seng Index touches previous highs. If the market continues to rise, hedge fund shorts may be forced to cover, and profit-taking investors may also be forced to buy back. This drives further upward movement.
2. The US market has fallen. The vast majority of Global investors continue to be Bullish on US stocks (the bull market in US stocks over the past decade has eliminated all shorts); on the other hand, they are concerned about short-term volatility and declines in US stocks, with some Global investors having previously shifted US stock investment positions to Other markets, including Hong Kong stocks. But they are still observing the earnings season starting in April. Historically, the strong performance of US companies during earnings seasons has led to good performance in the US stock market every earnings season. If the earnings season in April does not perform well, or after the earnings disclosure period, many investors may "sell in May and go away." The funds leaving the US stock market may increase positions in Hong Kong stocks, leading to a rise.
3. The benchmark interest rate has decreased. Due to the Fed's pause in interest rate cuts, interbank lending rates in Hong Kong remain high. However, we have observed a continuous decrease in broad money prices in the Hong Kong market, such as city investment bond rates (junk bond rates), which have been dropping since the beginning of this year, consistent with the decline in US Treasury yields. In the future, if the Fed resumes cutting rates, the interbank interest rates in Hong Kong will decline, the risk-free rate of Hong Kong stocks will drop, and Hong Kong stocks will rise.
4. Inflow of overseas funds. So far, nearly half of the net inflow of funds for the rise in the Hang Seng TECH Index comes from southern capital. Overseas funds have yet to fully exert their strength. In the future, if more data indicates that China's macroeconomy will hit the bottom of the real estate cycle in the 2nd and 3rd quarters of 2025, freeing itself from deflation. Once the CPI approaches 2% and the PPI turns positive, clear signals will indicate that corporate profits in 2025 will exceed those of 2024. At that point, a large amount of overseas funds will significantly flow into the Chinese market, not limited to the Technology Sector, leading to a comprehensive rise in Hong Kong stocks.
5. Historical experience shows that during the process of overseas funds flowing into Chinese Assets, Hong Kong stocks perform better than Stock Connect and outpace A-share performance.
Risk warning:
1) Economic recovery is not meeting expectations: Slower-than-expected economic recovery may exacerbate market uncertainty;
2) The pace of interest rate cuts by the Federal Reserve is slower than expected: This may negatively affect the liquidity in the A-shares market;
3) Geopolitical "black swan" events: Affecting foreign capital flows.
Editor/Jeffy
